tata steel (tatste) | 704 -...

October 31, 2017

ICICI Securities Ltd | Retail Equity Research

Result Update

Muted performance; set to improve...

Tata Steel reported muted Q2FY18 numbers. Tata Steel Europe’s

EBITDA/tonne came in lower than our estimates on account of lower

realisations while the EBITDA/tonne of Indian operations came in

lower on account of higher than expected operating costs

The Indian operations reported sales volume of 3.1 million tonnes (MT)

while European operations steel sales came in at 2.6 MT. The

consolidated operating revenues came in at | 32464.1 crore (up 23.1%

YoY, 9.8% QoQ) in line with our estimate of | 32468.6 crore

The EBITDA/tonne of domestic operations came in lower at

| 10959/tonne (our estimate: | 13500/tonne). European operations

reported an EBITDA/tonne of ~US$45/tonne (our estimate:

US$85/tonne). The consolidated reported EBITDA came in at | 4720.7

crore. The consolidated EBITDA margin was at 14.5% while ensuing

consolidated PAT was at | 1017.8 crore

JV with Thyssenkrupp to create No.2 steel player in Europe...

Tata Steel and Thyssenkrupp AG have signed a memorandum of

understanding (MoU) to combine their respective flat steel businesses in

Europe and for the steel mill services of Thyssenkrupp group. The

proposed 50:50 joint venture (JV) would be named Thyssenkrupp Tata

Steel. The JV would be formed through a non-cash transaction

framework, based on fair valuation where both shareholders would

contribute debt and liabilities to achieve equal shareholding in the

venture. The company intends to sign definitive agreement by March

2018 and is looking to close the deal by December 2018 or March 2019.

The new company Thyssenkrupp Tata Steel would have annual

shipments of ~21 million tonne with pro forma turnover & EBITDA of €15

billion (| 115000 crore) and ~€1.5 billion, respectively. Tata Steel’s initial

assessment indicates the JV to benefit from cost synergies in the range of

~€ 400-600 million realised through integration of commercial functions,

R&D and other supporting activities.

Focus on enhancing domestic operations to augur well…

Tata Steel’s Indian operations continued to register healthy sales volume

growth during H1FY18 which increased 23% YoY. The sales volume

growth was notably higher compared to the domestic steel consumption

growth of 4.3% YoY during the same period reflecting increase in Tata

Steel’s market share domestically. Going forward, the anticipated JV

(once it goes through) is expected to deleverage the consolidated balance

sheet of the entity and provide platform to pursue both organic/inorganic

growth in the domestic market which augurs well in the long run. We

upward revise domestic sales volume estimate for FY18E to 12.3 MT

(from 12 MT earlier), and maintain FY19E volume estimate of 12.5 MT.

Long term story intact; maintain BUY…

Tata Steel reported a muted Q2FY18 performance. Going forward, we

expect the realisations to increase in the backdrop of firming of domestic

steel prices. However, on account of subdued performance, we have

marginally downward revised EBITDA/tonne estimates for Indian

operations to | 11500/tonne (from | 12000/tonne earlier) for FY18E and

| 13250/tonne (from | 13500/tonne earlier) for FY19E. European

operations EBITDA/tonne estimate has been downward revised to US$65

/tonne (from US$75/tonne earlier) for FY18E, maintained for FY19E at

US$75/tonne. We have incorporated synergy benefit of the potential JV in

our target price. We have valued the stock on SOTP basis and arrived at a

target price of | 785. We maintain BUY rating.

Rating matrix

Rating : Buy

Target : | 785

Target Period : 12 months

Potential Upside : 12%

What’s Changed?

Target Changed from | 700 to | 785

EPS FY18E Changed from | 61 to | 54.9

EPS FY19E Changed from | 71.8 to | 70.3

Rating Unchanged

Quarterly Performance

Q2FY18 Q2FY17 YoY (%) Q1FY18 QoQ (%)

Revenue 32,464 26,371 23.1 29,557 9.8

EBITDA 4,721 2,970 58.9 4,974 (5.1)

EBITDA (%) 14.5 11.3 328 bps 16.8 -229 bps

Rep. PAT 1,018 (49) LP 921 10.5

Adj. PAT 1,043 (104) LP 1,532 (31.9)

Key Financials

(| Crore) FY16 FY17 FY18E FY19E

Net Sales 117151.6 112299.4 130858.4 134790.1

EBITDA 7585.6 17007.8 19256.6 22202.1

Adj Net Profit -2243.2 4092.1 5324.2 6817.5

EPS (|) -23.1 42.2 54.9 70.3

Valuation summary

FY16 FY17 FY18E FY19E

PE (x) NA 16.7 12.8 10.0

Target PE (x) NA 18.6 14.3 11.2

EV/EBITDA(x) 19.7 8.7 7.6 6.4

P/BV (x) 2.2 1.8 2.0 1.7

Adj RoNW (%) -7.3 10.8 15.5 17.0

Adj RoCE (%) 2.1 9.4 11.5 12.3

Stock data

Particular Amount

Market Capitalization (| Crore) 68,402

Total Debt (FY17) (| Crore) 83,014

Cash & Cash Eq. (FY17) (| Crore) 17,458

EV (| Crore) 133,958

52 week H/L (|) 735 / 366

Equity capital | 970.2 Crore

Face value | 10

Price performance (%)

Return % 1M 3M 6M 12M

JSW Steel 6.2 22.3 32.6 59.1

Tata Steel 10.1 30.1 59.9 77.5

Research Analyst

Dewang Sanghavi

[email protected]

Akshay Kadam

[email protected]

Tata Steel (TATSTE) | 704


Variance analysis

Q2FY18 Q2FY18E Q2FY17 YoY (%) Q1FY18 QoQ (%)

Revenue 32,464.1 32,468.6 26,371.0 23.1 29,556.8 9.8 Topline came in line with our estimates

Other Income 253.2 135.4 108.4 133.6 155.5 62.8

Employee Expense 4,294.1 4,294.7 4,518.3 -5.0 4,303.9 -0.2

Raw Material Expense 14,289.6 13,312.1 9,406.8 51.9 11,069.9 29.1

Other operating Expenses 9,159.8 9,089.1 9,475.9 -3.3 9,209.1 -0.5

EBITDA 4,720.7 5,772.6 2,970.0 58.9 4,973.9 -5.1 EBITDA came in lower than our estimates

EBITDA Margin (%) 14.5 17.8 11.3 328 bps 16.8 -229 bps EBITDA margin came in lower than our estimates

Depreciation 1,473.3 1,523.8 1,467.7 0.4 1,501.1 -1.9

Interest 1,349.9 1,250.8 1,351.1 -0.1 1,343.7 0.5

Exceptional Item 24.9 - 68.4 -63.7 610.9 -95.9

PBT 2,125.8 3,133.4 191.2 1,011.8 1,673.7 10.5

Tax Outgo 1,138.0 1,034.0 363.2 213.3 740.5 53.7

PAT 987.8 2,099.4 (172.0) -674.3 933.2 5.9

Profit from discontinued operations 29.9 - 122.7 -75.6 (12.1) -347.4

Reported PAT for the Group 1,017.8 2,099.4 (49.3) LP 921.1 10.5 PAT came in lower than our estimates

Adjusted PAT for the Group 1,042.6 2,099.4 (103.7) LP 1,532.0 -31.9

Key Metrics

TSI Steel Sales (MT) 3.1 3.1 2.6 18.5 2.8 10.0

TSE Steel Sales (MT) 2.6 2.6 2.3 13.0 2.4 8.3

Group Steel Sales (MT) 6.5 6.5 5.7 13.2 5.8 11.2

TSI EBITDA/tonne (|/tonne) 10,959 10,959 7,297 50.2 10,786 1.6 TSI EBITDA/tonne came in lower than our estimates

TSE EBITDA/tonne (US$/tonne) 44.9 43.9 67.2 -33.2 80.0 -43.9 TSE EBITDA/tonne came in lower than our estimates

TSI: Tata Steel India; TSE: Tata Steel Europe

Source: Company, ICICIdirect.com Research

Change in estimates

(| Crore) Old New % Change Old New % Change Comments

Total Operating Income (| crore) 130,651 130,858 0.2 135,858 134,790 (0.8) Downward revised estimates for both years on all fronts

EBITDA (| crore) 20,139 19,257 (4.4) 22,514 22,202 (1.4)

EBITDA Margin (%) 15.4 14.7 (4.5) 16.6 16.5 (0.6)

Adj PAT (| crore) 5,915 5,324 (10.0) 6,967 6,817 (2.1)

Adj EPS (|) 61.0 54.9 (10.0) 71.8 70.3 (2.1)

FY19EFY18E


Assumptions

Comments

FY17 FY18E FY19E FY18E FY19E

TSI Steel Sales (MT) 11.0 12.3 12.5 12.0 12.5 Upward revised sales volume estimates for FY18E

TSE Steel Sales (MT) 9.9 10.0 10.0 10.0 10.0 Maintained estimates

Group Steel Sales (MT) 23.9 26.8 27.0 26.5 26.5 Upward revised sales volume estimates

TSI EBITDA/tonne (|/tonne) 10,901 11,500 13,250 12,000 13,500 Revised downward for both years

TSE EBITDA/tonne (US$/tonne) 71.0 65.0 75.0 75.0 75.0 Revised downwards for FY18E, maintained for FY19E

TSI: Tata Steel India; TSE: Tata Steel Europe

EarlierCurrent



Company Analysis

Healthy increase in domestic sales volume augurs well…

Tata Steel’s Indian operations continued to register healthy sales volume

growth during H1FY18 which increased 23% YoY. The sales volume

growth was notably higher compared to the domestic steel consumption

growth of 4.3% YoY during the same period reflecting increase in Tata

Steel’s market share domestically. We upward revise domestic sales

volume estimate for FY18E to 12.3 MT (from 12 MT earlier), and maintain

FY19E volume estimate of 12.5 MT.

Integrated Jamshedpur operations bode well in the long run……

The company’s Jamshedpur plant has access to captive raw materials

(100% integration for iron ore and ~35% integration for coking coal). This

enables TSL to realise superior EBITDA margins compared to its domestic

peers. Going forward, over the next couple of years, we expect Indian

operations to clock an EBITDA/tonne of ~| 11500-13250/tonne, higher

than its peers.

Exhibit 1: Domestic volumes to grow at CAGR of ~7% in FY17E-19E…

8.5 8.8

9.5

11.0

12.3 12.5

0

2

4

6

8

10

12

14

FY2014 FY2015 FY2016 FY2017 FY2018E FY2019E

million tonne


Exhibit 2: ..domestic EBITDA/tonne likely to augment further…

15043

11433

7388

1090111500

13250

0

2000

4000

6000

8000

10000

12000

14000

16000

18000

20000

FY2014 FY2015 FY2016 FY2017 FY2018E FY2019E

|/tonne


European operations report a muted EBITDA/tonne for Q2FY18...

The European operations reported a muted EBITDA/tonne of

~US$45/tonne (vs. US$80/tonne in Q1FY18, US$67/tonne in Q2FY17).

The EBITDA during the quarter was impacted by lower sales realisations

which declined to €470/tonne from €540/tonne in Q1FY18. The higher raw

material cost further impaired EBITDA.

We downward revise our EBITDA/tonne estimate for FY18E to

US$65/tonne (from US$75/tonne earlier) and maintain FY19E estimate of

US$75/tonne.

TSL India outshines domestic demand in FY15 & FY16

3.3

12.913.8

2.7

9.0

15.0

6.7

3.3

0.6

3.1

4.3

3

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

FY2012 FY2013 FY2014 FY2015 FY2016 FY2017

%

Tata Steel India YoY Domestic Steel Demand YoY



Exhibit 3: Trend in Tata Steel’s Europe’s volume…

13.9 13.7

13.0

9.9 10.0 10.0

5.0

7.0

9.0

11.0

13.0

15.0

FY2014 FY2015 FY2016 FY2017 FY2018E FY2019E

million tonne


Exhibit 4: … TSE EBITDA/tonne to improve

34

50

-7

71

65

75

-20

-10

0

10

20

30

40

50

60

70

80

FY2014 FY2015 FY2016 FY2017 FY2018E FY2019E

US

$/tonne


Exhibit 5: Share of domestic sales volume in overall group sales

26.6

26.3

26.3

23.9

26.8

27.0

8.5

8.8

9.5

11.0

12.3

12.5

32

3336

4646

46

0

5

10

15

20

25

30

35

40

45

50

0

5

10

15

20

25

30

FY2014 FY2015 FY2016 FY2017 FY2018E FY2019E

%

million tonne

Tata Steel Group Tata Steel India India's Proportion to Total sales


Exhibit 6: Consolidated EBITDA margin trend

11.1

9.0

6.5

15.1 14.7

16.5

0

4

8

12

16

20

FY2014 FY2015 FY2016 FY2017 FY2018E FY2019E

%

Tata Steel Group



Debt levels to remain stable

The net debt during the quarter increased by | 6600 crore QoQ to | 78303

crore (vs. | 71703 crore in Q1FY18) due to higher working capital outgo,

transition loss and onetime cash payment for regulated apportionment of

BSPS.

The gross debt of | 83014 crore as on March 31 2017 increased by | 1028

crore on a YoY basis. The net debt at | 72367 crore increased by | 1268

crore YoY. However, the same is expected to witness a declining trend in

FY18E and FY19E.

Exhibit 7: Net debt to remain stable

81986

83014

81414

80214

73635

72367

75567

72623

0

20000

40000

60000

80000

100000

FY2016 FY2017 FY2018E FY2019E

| c

rore

Gross Debt Net Debt

Source: Company, ICICIdirect.com Research, Net debt is Gross Debt minus Cash


Key highlights of Tata Steel - Thyssenkrupp joint venture...

The proposed 50:50 joint venture – Thyssenkrupp Tata Steel would

focus on quality and technology leadership and supply of premium

and differentiated products to its customers

The management indicated both the parties envision a long term

association and would continue the present network configuration of

all the upstream hubs in the proposed joint venture

The management indicated the shareholders of both the parties have

taken care to ensure a sustainable business going forward

The synergies would primarily be derived from an integration of sales

and administration, research & development, a joint optimisation of

procurement, logistics and service centres. In addition to this,

Thyssenkrupp Tata Steel would seek to improve capacity utilisation of

the network across IJmuiden (Netherlands), Duisburg (Germany) and

Port Talbot (Wales, UK) and their related downstream facilities

The new proposed entity to have a debt of ~€ 6.5 billion, of which €

2.5 billion pertains to the debt on the book of Tata Steel Europe (TSE),

€ 3.6 billion of pension liabilities of Thyssenkrupp and the balance €

0.4 billion being legacy debt

The management indicated that the € 3.6 billion pension liabilities with

the JV is close ended and carries interest rate of 1.2%. Essentially it

forms debt with extremely low interest rate and no refinancing

liability.

The management indicated BSPS 2 will have significant pension

surplus at the start. The emphasis will be matching ALM and not

creating volatility like in the past

Post JV, the annual capex requirement on consolidated basis would

stand at ~€ 750 million, while the interest outgo will amount to ~€

300 million.

Tata Steel’s consolidated net debt as on date was at ~| 74000 crore.

Of this, ~| 40000 crore is in the books of Tata Steel India while ~|

17000 crore is on the books of Tata Steel Europe (which would be

transferred to new JV) and the balance ~| 17000 crore in the

Singapore subsidiary

The proposed JV would have high dividend payout benefiting both

the parties. Tata Steel indicated it will service the debt in the

Singapore entity through these dividends

The JV will be able to take benefit of the tax credits of loss making UK

facilities once profitable

The accounting for Tata Steel will be on equity basis and as such

there will be a one-line impact in the financials. Accounting will begin

post closure of the deal

The process will now enter the next phase in the transaction with due

diligence and negotiations on the definitive detailed agreements

(expected to be completed by March 2018). The combination is

further subjected to various shareholders’, anti-trust and other

regulatory approvals. By and large, the management expects the deal

to be concluded by December 2018 or March 2019

JV Pro forma financials

Tata Steel Thyssenkrupp

Indicative

Total

Deliveries (MT) 9.8 11.5 21.3

Turnover (€ Billion) 7.4 8.6 16.0

EBITDA (€ Billion) 0.7 0.9 1.6

Term Debt (€ Billion) - - 2.5

Source: Company, ICICIdirect.com Research, *June-17 (LTM)


Conference call highlights & other key developments…

Global steel demand/supply position appears favourable with capacity

closures in China. Global steel production is up 5.6% YoY in 9MCY17

compared to the demand growth forecast of 7% in CY17

China has closed ~120 million tonne (MT) of capacity since the start

of 2016. Chinese steel demand is on an increasing trend. The

utilisation of mainstream steel producers has improved supported by

the closure of outdated induction furnaces. Chinese exports declined

to an annualised level of 75 MT in Q3CY17 compared to 118 MT in

Q2CY17. Regional steel prices have rebounded with improved

demand in China, better steel inventory levels and higher raw material

cost

Indian operations

Net sales realisation during the quarter was impacted by a) lower

ferrochrome prices (impact of ~| 550/tonne QoQ) and b) changes in

business model of tinplate (impact of ~| 1000/tonne QoQ)

During the quarter, prices of flat products increased ~| 2000/tonne,

while long product realisations were relatively soft. Domestic steel

prices continue to be at a discount compared to international prices

Sales volumes during the quarter witnessed strong growth of ~18.5%

YoY and 10% QoQ largely supported by near full ramp up of the

Kalinganagar facility. The Kalinganagar facility is operating the blast

furnace at 100% while the utilisation level of downstream facilities is

at ~95%

The consumption cost of coking coal for Q2FY18 was at

US$155/tonne (vs. US$175/tonne in Q1FY18)

The branded and retail product segment grew 14% YoY and 16%

QoQ. The company captured demand growth in solar projects,

railways, yellow goods and PEB segment due to improved

government spending, festive season and re-stocking

Automotive steel sales grew 23% YoY and 14% QoQ. The company

enhanced its market share with focus on new grades development

and new vehicle models

The industrial products, project and exports segment grew ~60%

YoY and 18% QoQ in value added & new segments (PEB, L&E, C&P

and API). The company added new customers in PEB and L&E

segments. Tata Steel secured orders for water pipeline projects and is

witnessing better traction in MCHC and LPG segment

The overall outlook for the steel market remains buoyant. However, a

jump in steel imports during Q2FY18 poses a risk. Accelerating

government reforms are expected to result in stronger growth.

However, private sector investment still remains muted

The implementation of GST and increased tax transparency is

expected to facilitate the growth of organised players

The company expects rural demand to recover due to good

monsoon, higher MSP for crops, MNREGA and loan waivers

European operations

The eurozone economy grew 2.3% YoY in Q2CY17. UK economic

growth remained at 1.5% in Q3CY17

EU steel demand growth was at 1.5% YoY in H1CY17. During the

period, domestic deliveries increased 0.5% YoY while imports rose

8.3% YoY

Deliveries during Q2FY18 were up 15% YoY and 8% QoQ, in part due

to one-off sales and supply chain improvements


Revenues were up 32% YoY and 5% QoQ reflecting higher deliveries

and an uplift in sales of differentiated products

The TSE EBIDTA/tonne was impacted by lower realisation (Q2FY18:

~ €470/tonne vs. Q1FY18: ~€540/tonne) and higher raw material

cost. The consumption cost of coking coal during the quarter was at

US$163/tonne

The EU economy is expected to grow ~2.2% in 2017. The UK

economy is forecast to grow ~1.5% as higher inflation weakens

consumer spending growth

European steel demand is expected to grow ~1.9% in 2017, in line

with the modest economic growth. European steel mills are expected

to continue to remain under pressure from imports

South East Asia Operations

South East Asia rebar spreads improved with higher steel prices in

domestic as well as exports market

Revenues increased 22% both YoY and QoQ to | 2424 crore. The

EBITDA improved to | 135 crore (vs. | 22 crore in Q1FY18) with

higher deliveries and improved spreads

Nat Steel Holdings production was up 11% YoY, 18% QoQ. Deliveries

were up 4% YoY, 7% QoQ despite weak domestic market conditions.

The EBITDA improved on higher volumes and better spreads. The

company will continue to focus on key markets for exports

Tata Steel Thailand’s deliveries increased 3% YoY and 17% QoQ. The

wire rod sales grew 81% YoY and 24% QoQ. Profitability during the

quarter improved on account of improved long product realisations

and deliveries

The company expects Singapore construction sector to improve with

commencement of the new projects. In Thailand, increase in public

investment on large scale infrastructure projects is expected to

support steel demand.

Other highlights

The management expects the cost of coking to decline by

~US$10/tonne in Q3FY18 for both Indian as well as European

operations

The management expects the Indian net sales realisations to increase

~|1000/tonne in Q3FY18.

The board has started with the engineer working plans in

Kalinganagar and is in an advanced phase. There is no delay in the

timelines and management has given guidance that hot metal

capacity will be of 5 million tonne (MT) in all probability.

The company’s Q2FY18 exports were at ~0.3 MT. The management

expects the full year exports to be ~1.1-1.2 MT in FY18.

The deferred tax takes into account the pension provisioning of £550

million, which was accounted as a settlement in other comprehensive

income (OCI). This has resulted in a tax rate of 52% in the quarter

The management indicated the company has no scheduled debt

repayment

The management maintained the capex guidance of ~| 7000 crore for

FY18. During the quarter, the company incurred capex of ~| 1834

crore. For H1FY18, the capex spend was at ~| 3380 crore

The gross debt during the quarter increased by | 2447 crore to

| 90259 crore primarily on account of increase in working capital lines


and forex impact. The liquidity position of the group remains robust

with cash & cash equivalents and undrawn bank lines of | 19800 crore

The foreign exchange loss for the quarter was ~| 300 crore due to

translation effect of loans in Singapore

The company signed MoU for 50:50 joint venture with Thyssenkrupp

to create a leading European steel enterprise

The pensions regulator has approved the Regulatory Apportionment

Agreement with respect to BSPS and payment of £550 million has

been completed. The BSPS has been now separated from Tata Steel

UK and a number of affiliated companies. The next step would be

completion of necessary formalities to set up a new scheme with

lower risk profile following member consent process led by trustee

The company completed sale of 42-inch and 84-inch pipe mills in

Hartlepool to Liberty House group

Tata Steel has acquired full intellectual property rights in Hlsarna

Technology, which has the potential to reduce energy use and carbon

emissions by at least 20%, as well as reducing the steel making costs

through lower priced raw materials

The management believes India will be a net exporter of steel in FY18


Outlook and valuation

Tata Steel’s Q2FY18 performance was marred by a fall in realisations and

increased costs. The company, however, continued to report healthy

sales volume growth (H1FY18: 23% YoY). We expect the benefits of

healthy increase in domestic steel prices and moderation in the raw

material cost to come with a lag. We downward revise EBITDA/tonne

estimates for TSI to | 11500/tonne (from | 12000/tonne earlier) for FY18E

and | 13250/tonne (from | 13500/tonne earlier) for FY19E. TSE

EBITDA/tonne estimate has been downward revised to US$65 /tonne

(from US$75/tonne earlier) for FY18E and maintained for FY19E at

US$75/tonne. We expect the potential joint venture to get through, post

which the European business will be housed in the JV with

Thyssenkrupp, lowering the impact at consolidated level on Tata Steel.

We incorporate the synergy benefit of |112/share from the potential JV in

our target price. Of this ~| 194/share comes from debt reduction, while

valuation of Tata Steel Europe reduces by |82/share due to farm out. We

value the stock on SOTP basis and arrive at target price of | 785. We

maintain BUY rating.

Exhibit 10: Valuation Matrix

Total Op. Income Growth EPS Growth PE EV/EBIDTA P/ BV RoNW RoCE

(| Crore) % YoY (|) % YoY (x) (x) (x) (%) (%)

FY15 138319 -6.1 NM NM NM 11.2 2.0 0.0 5.8

FY16 115952 -16.2 -23.1 NM NA 19.7 2.2 -7.3 2.1

FY17 111562 -3.8 42.2 LP 16.7 8.7 1.8 10.8 9.4

FY18E 129869 16.4 54.9 30.1 12.8 7.6 2.0 15.5 11.5

FY19E 133750 3.0 70.3 28.0 10.0 6.4 1.7 17.0 12.3


Exhibit 8: Target price calculation

| crore

Tata Steel India EBITDA FY19E (A) 16564

EV/EBITDA Multiple Assigned (B) 7

Other Subs EBITDA FY18E (C) 764

EV/EBITDA Multiple Assigned (D) 5

Tata Steel Total EV (E = A*B + C*D) 111487

Tata Steel Gross Debt 61359

Cash & Cash Eq (G) 10775

Minority Interest (H) 1492

Net Debt (I = F-G+H) 52076

Add: 50% stake valuation in potential European steel JV (J) 16381

Add: Investments valued at 30% discount (K) 385

Arrived Market Capitalisation (L= E-I+J+K) 76177

No. of Shares 97

Target Price (|) 785


Exhibit 9: Tata Steel – Thyssenkrupp JV (Synergy value based on JV assumptions)

Volume (MT) 21

EBITDA/tonne (|/tonne) 6500

EBITDA (| crore) 13650

Multiple (x) 6

EV (| crore) 81900

Debt (| crore) 49138

Mcap (| crore) 32762

Tata Share (50%) (| crore) 16381



Recommended History vs. Consensus Chart

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

100

200

300

400

500

600

700

800

Oct-17Aug-17Jun-17Mar-17Jan-17Oct-16Aug-16May-16Mar-16Jan-16

(%

)(|)

Price Idirect target Consensus Target Mean % Consensus with BUY

Source: Bloomberg, Company, ICICIdirect.com Research

Key events

Date Event

May-17

India Ratings (Ind-Ra) maintains rating watch evolving (RWE) on Tata Steel's credit rating of IND AA/IND A1+. The RWE reflects the uncertainty regarding the

divestments and/or formation of joint ventures (JVs) pertaining to TSL’s European operations. Ind-Ra expects to resolve the rating watch by October 2017, after it

gains greater clarity on the same

Jun-17 Tata Steel sells 8.35 crore shares of Tata Motors to Tata Sons at a price of | 452.8/ share (excluding brokerage and STT) resulting into a cash inflow of | 3783 crore.

Jun-17 Tata Steel completes disinvestment of its entire equity stake in the 50% joint venture Tata Elastron SA to Elastron SA for a consideration of € 0.37 million

Jun-17

Tata Steel completes sale of its 42 inch and 84 inch submerged arc weld (SAW) pipe mills in Hartlepool to Liberty House Group. The two mills are independent of the

company's strip products supply chain in the UK. Tata Steel did not disclose the consideration involved in the deal

Aug-17

Tata Steel has signed an agreement on segregating the company’s UK business from its pension scheme that will potentially free it up to pursue strategic options for

the unit. As part of the arrangement, Tata Steel UK will make a payment of £550 million to the British Steel Pension Scheme (BSPS) while 33% of Tata Steel UK’s

equity will be issued to the scheme’s trustee

Sep-17

Tata Steel UK has received confirmation from The Pensions Regulator regarding approval of Regulated Apportionment Arrangement (RAA) with respect to the British

Steel Pension Scheme (BSPS). As part of RAA, Tata Steel UK has made a payment of £ 550 million and issued shares equivalent to a 33% stake in the company to

the BSPS Trustee under the terms of a shareholder's agreement

Sep-17

Tata Steel and Thyssenkrupp AG have signed an MoU to combine their respective flat steel businesses in Europe and for the steel mill services. The proposed JV

would be named Thyssenkrupp Tata Steel which will have annual shipments of ~21 million tonne (MT) and is likely to have a proforma turnover of ~ €15 billion per

annum (|115000 crore). The JV would be formed through a non cash transaction framework, based on fair valuation where both shareholders would contribute debt

and liabilities to achieve equal shareholding in the venture. The company intends to sign definitive agreement by March 2018 and is looking to close the deal by

December 2018 or March 2019

Oct-17

Tata Steel has acquired Rio Tinto's smelter technology and intellectual property rights required to operate Hisarna process. The technology removes a number of pre-

processing steps, resulting in significant efficiency gains and 20% reduction in energy use and carbon dioxide emissions as well as reducing steelmaking costs

through lower priced raw materials (up to half of which could be recycled scrap steel)


Top 10 Shareholders Shareholding Pattern

Rank Name Latest Filing Date % O/S Position (m) Change (m)

1 Tata Group of Companies 30-Jun-17 31.1 301.8 0.0

2 Life Insurance Corporation of India 30-Jun-17 11.9 115.3 -6.7

3 HDFC Asset Management Co., Ltd. 30-Jun-17 4.4 42.6 1.5

4 ICICI Prudential Asset Management Co. Ltd. 30-Jun-17 3.0 28.7 4.6

5 Reliance Nippon Life Asset Management Limited 30-Jun-17 2.5 24.5 0.9

6 Norges Bank Investment Management (NBIM) 30-Jun-17 1.2 12.1 1.1

7 Dimensional Fund Advisors, L.P. 31-Aug-17 1.1 10.6 0.0

8 The New India Assurance Co. Ltd. 30-Jun-17 1.1 10.4 -0.4

9 DSP BlackRock Investment Managers Pvt. Ltd. 30-Jun-17 1.0 9.7 0.6

10 BlackRock Institutional Trust Company, N.A. 30-Sep-17 1.0 9.5 -0.1

Source: Reuters, ICICIdirect.com Research

(in %) Sep-16 Dec-16 Mar-17 Jun-17 Sep-17

Promoter 31.4 31.4 31.4 31.4 31.4

FII 13.6 13.0 14.0 13.7 15.7

DII 29.2 30.8 30.7 30.3 29.7

Others 25.8 24.8 23.9 24.7 23.3

Recent Activity

Investor name Value (m) Shares (m) Investor name Value (m) Shares (m)

ICICI Prudential Asset Management Co. Ltd. 39.0 4.6 Life Insurance Corporation of India -56.7 -6.7

HDFC Asset Management Co., Ltd. 13.1 1.5 APG Asset Management -43.9 -5.9

Norges Bank Investment Management (NBIM) 9.3 1.1 Lyxor Asset Management -8.3 -1.1

Reliance Nippon Life Asset Management Limited 7.9 0.9 T. Rowe Price Associates, Inc. -6.5 -0.8

Allianz Global Investors U.S. LLC 6.1 0.6 Amundi Asset Management -4.3 -0.5

Buys Sells

Source: Reuters, ICICIdirect.com Research


Financial summary (Consolidated)

Profit and loss statement (| crore)

(Year-end March) FY16 FY17 FY18E FY19E

Net Sales 115951.7 111562.1 129868.6 133749.7

Other Operating Income 1199.9 737.4 989.8 1040.5

Total Operating Income 117151.6 112299.4 130858.4 134790.1

Growth (%) -16.2 -3.8 16.4 3.0

Raw Material Expenses 44816.1 39304.9 51922.2 51643.6

Employee Expenses 19966.8 17252.2 18492.7 19162.0

Purchase of Power 5433.6 0.0 7012.6 7082.5

Other expenses 39349.4 38734.5 34174.2 34699.9

Total Operating Expenditure 109565.9 95291.6 111601.8 112588.1

EBITDA 7585.6 17007.8 19256.6 22202.1

Growth (%) -39.5 124.2 13.2 15.3

Depreciation 5081.8 5672.9 6072.4 7491.3

Interest 4128.6 5072.2 5096.1 5112.1

Other Income 3925.7 527.5 561.6 565.3

PBT 2300.8 6790.2 8649.8 10164.0

Exceptional Item -3974.9 -4316.6 -617.0 0.0

Total Tax 1505.0 2778.0 2650.8 3294.5

PAT -3179.0 -304.4 5382.0 6869.5

Growth (%) LP -90.4 -1868.2 27.6

Minorities, Associates etc 129.7 -64.2 -57.8 -52.0

Rep PAT after Assoc., MI -3049.3 -368.6 5324.2 6817.5

Adj PAT after Assoc., MI -2243.2 4092.1 5324.2 6817.5

Growth (%) NM -282.4 30.1 28.0

EPS (|) -23.1 42.2 54.9 70.3


Cash flow statement (| crore)


Profit after Tax -3049.3 -368.6 5324.2 6817.5

Add: Depreciation 5081.8 5672.9 6072.4 7491.3

(Inc)/dec in Current Assets -3635.8 6666.0 -6798.4 -1282.4

Inc/(dec) in CL and Prov. 1701.3 -1134.7 8773.3 191.3

Others 20.4 7125.2 0.0 0.0

CF from operating activities 118.4 17960.8 13371.4 13217.6

(Inc)/dec in Investments -3345.6 -5736.1 4959.1 -4000.0

(Inc)/dec in Fixed Assets -4128.3 -27551.4 -6383.0 -5200.0

Others -49.6 -52.5 -57.8 -52.0

CF from investing activities -7523.5 -33340.1 -1481.7 -9252.0

Issue/(Buy back) of Equity 0.0 -20.0 0.0 0.0

Inc/(dec) in loan funds 5503.0 -3190.0 -1600.0 -1200.0

Dividend paid & dividend tax 179.9 -908.1 -1021.7 -1021.7

Inc/(dec) in Share Cap 0.0 8342.2 -8342.2 0.0

Others -311.0 9360.6 0.0 0.0

CF from financing activities 5371.9 13584.7 -10963.9 -2221.7

Net Cash flow -2033.1 -1794.6 925.9 1743.9

Opening Cash 8748.8 6715.6 4921.1 5847.0

Closing Cash 6715.6 4921.1 5847.0 7590.9


Balance sheet (| crore)


Liabilities

Equity Share Capital 970.2 970.2 970.2 970.2

Hybrid Perpetual securities 2,275.0 2,275.0 2,275.0 2,275.0

Reserve and Surplus 27508.6 34574.1 31151.4 36947.2

Total Shareholders funds 30753.9 37819.3 34396.7 40192.5

Total Debt 86204.0 83014.0 81414.0 80214.0

Deferred Tax Liability 2904.9 10030.1 10030.1 10030.1

Minority Interest & Others 1674.2 1601.7 1543.9 1491.9

Total Liabilities 121537.0 132465.1 127384.6 131928.4

Assets

Gross Block 177463.1 183767.2 192767.2 206767.2

Less: Impairment 15692.0 0.0 0.0 0.0

Less: Acc Depreciation 89582.5 95255.4 101327.7 108819.0

Net Block 72188.6 88511.8 91439.5 97948.2

CWIP 10228.8 15784.1 13784.1 4984.1

Investments 6800.6 12536.7 7577.6 11577.6

Goodwill on Consolidation 13719.4 3494.7 3494.7 3494.7

Inventory 20356.0 24803.8 32006.9 30278.7

Debtors 11701.2 11586.8 14232.2 13191.7

Loans and Advances 19688.7 7587.4 4437.4 8388.4

Other Current Assets 1829.3 2931.1 3031.1 3131.1

Cash 6715.6 4921.1 5847.0 7590.9

Total Current Assets 60290.8 51830.2 59554.5 62580.8

Current Liabilities 29197.3 18574.5 28347.7 29539.0

Provisions 12515.8 22003.9 21003.9 20003.9

Current Liabilities & Prov 41713.1 40578.4 49351.7 49542.9

Net Current Assets 18577.7 11251.8 10202.8 13037.9

others 21.9 885.9 885.9 885.9

Application of Funds 121537.0 132465.1 127384.6 131928.4


Key ratios


Per share data (|)

Adj EPS -23.1 42.2 54.9 70.3

Cash EPS 29.3 100.6 117.5 147.5

BV 317.0 389.8 354.5 414.3

Adj BV (adj for Goodwill) 175.6 353.8 318.5 378.2

DPS 8.0 8.0 9.0 9.0

Cash Per Share 69.2 50.7 60.3 78.2

Operating Ratios (%)

EBITDA Margin 6.5 15.1 14.7 16.5

PBT / Total Operating income 2.0 6.0 6.6 7.5

Adj PAT Margin -1.9 3.6 4.1 5.1

Inventory days 185 210 225 214

Debtor days 39 38 40 36

Creditor days 261 199 175 216

Return Ratios (%)

Adj RoE -7.3 10.8 15.5 17.0

Adj RoCE 2.1 9.4 11.5 12.3

RoIC 2.3 9.8 12.0 13.0

Valuation Ratios (x)

P/E NA 16.7 12.8 10.0

EV / EBITDA 19.7 8.7 7.6 6.4

EV / Net Sales 1.3 1.3 1.1 1.1

Market Cap / Sales 0.6 0.6 0.5 0.5

Price to Book Value 2.2 1.8 2.0 1.7

Price to Adj Book Value 4.0 2.0 2.2 1.9

Solvency Ratios

Debt/EBITDA 11.4 4.9 4.2 3.6

Debt / Equity 2.8 2.2 2.4 2.0

Current Ratio 1.4 1.3 1.2 1.3

Quick Ratio 1.0 0.7 0.6 0.7



ICICIdirect.com coverage universe (Metals & Mining)

CMP M Cap

(|) TP (|) Rating (| Cr) FY17 FY18E FY19E FY17 FY18E FY19E FY17 FY18E FY19E FY17 FY18E FY19E FY17 FY18E FY19E

Coal India 289 260 Hold 179332 14.9 16.2 17.5 18.8 17.4 16.1 9.9 9.4 8.7 33.5 33.3 32.4 37.8 35.7 34.3

Hindalco 273 260 Buy 60842 8.4 19.2 25.0 27.8 12.2 9.4 8.4 7.3 6.4 6.9 8.7 9.7 4.1 8.8 10.0

Hindustan Zinc 314 350 Buy 132559 19.7 25.6 29.5 16.0 12.3 10.6 11.1 8.1 6.0 26.9 35.7 34.8 27.0 28.6 27.2

JSW Steel 264 240 Buy 63778 14.3 20.8 22.0 15.1 10.4 9.9 7.7 6.9 6.7 13.4 14.8 14.2 15.3 18.8 16.9

Vedanta 341 285 Hold 101092 15.1 27.6 34.1 18.2 10.0 8.1 5.3 4.6 3.9 12.1 14.2 15.3 9.3 15.0 16.0

Tata Steel 705 785 Buy 64909 42.2 54.9 70.3 16.7 12.8 10.0 8.7 7.6 6.4 9.4 11.5 12.3 10.8 15.5 17.0

ROCE(%)EV/EBITDA (x) ROE(%)EPS (|) P/E (x)

Company



RATING RATIONALE

ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns

ratings to its stocks according to their notional target price vs. current market price and then categorises them

as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional

target price is defined as the analysts' valuation for a stock.

Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction;

Buy: >10%/15% for large caps/midcaps, respectively;

Hold: Up to +/-10%;

Sell: -10% or more;

Pankaj Pandey Head – Research [email protected]

ICICIdirect.com Research Desk,

ICICI Securities Limited,

1st Floor, Akruti Trade Centre,

Road No 7, MIDC,

Andheri (East)

Mumbai – 400 093

[email protected]


ANALYST CERTIFICATION

We /I, Dewang Sanghavi MBA (FIN) and Akshay Kadam MBA (FIN), Research Analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report

accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or

view(s) in this report.

Terms & conditions and other disclosures:

ICICI Securities Limited (ICICI Securities) is a full-service, integrated investment banking and is, inter alia, engaged in the business of stock brokering and distribution of financial products. ICICI Securities

Limited is a Sebi registered Research Analyst with Sebi Registration Number – INH000000990. ICICI Securities is a wholly-owned subsidiary of ICICI Bank which is India’s largest private sector bank and has

its various subsidiaries engaged in businesses of housing finance, asset management, life insurance, general insurance, venture capital fund management, etc. (“associates”), the details in respect of which

are available on www.icicibank.com.

ICICI Securities is one of the leading merchant bankers/ underwriters of securities and participate in virtually all securities trading markets in India. We and our associates might have investment banking

and other business relationship with a significant percentage of companies covered by our Investment Research Department. ICICI Securities generally prohibits its analysts, persons reporting to analysts

and their relatives from maintaining a financial interest in the securities or derivatives of any companies that the analysts cover.

The information and opinions in this report have been prepared by ICICI Securities and are subject to change without any notice. The report and information contained herein is strictly confidential and

meant solely for the selected recipient and may not be altered in any way, transmitted to, copied or distributed, in part or in whole, to any other person or to the media or reproduced in any form, without

prior written consent of ICICI Securities. While we would endeavour to update the information herein on a reasonable basis, ICICI Securitiesis under no obligation to update or keep the information current.

Also, there may be regulatory, compliance or other reasons that may prevent ICICI Securities from doing so. Non-rated securities indicate that rating on a particular security has been suspended

temporarily and such suspension is in compliance with applicable regulations and/or ICICI Securities policies, in circumstances where ICICI Securities might be acting in an advisory capacity to this

company, or in certain other circumstances.

This report is based on information obtained from public sources and sources believed to be reliable, but no independent verification has been made nor is its accuracy or completeness guaranteed. This

report and information herein is solely for informational purpose and shall not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial

instruments. Though disseminated to all the customers simultaneously, not all customers may receive this report at the same time. ICICI Securities will not treat recipients as customers by virtue of their

receiving this report. Nothing in this report constitutes investment, legal, accounting and tax advice or a representation that any investment or strategy is suitable or appropriate to your specific

circumstances. The securities discussed and opinions expressed in this report may not be suitable for all investors, who must make their own investment decisions, based on their own investment

objectives, financial positions and needs of specific recipient. This may not be taken in substitution for the exercise of independent judgment by any recipient. The recipient should independently evaluate

the investment risks. The value and return on investment may vary because of changes in interest rates, foreign exchange rates or any other reason. ICICI Securities accepts no liabilities whatsoever for any

loss or damage of any kind arising out of the use of this report. Past performance is not necessarily a guide to future performance. Investors are advised to see Risk Disclosure Document to understand the

risks associated before investing in the securities markets. Actual results may differ materially from those set forth in projections. Forward-looking statements are not predictions and may be subject to

change without notice.

ICICI Securities or its associates might have managed or co-managed public offering of securities for the subject company or might have been mandated by the subject company for any other assignment

in the past twelve months.

ICICI Securities or its associates might have received any compensation from the companies mentioned in the report during the period preceding twelve months from the date of this report for services in

respect of managing or co-managing public offerings, corporate finance, investment banking or merchant banking, brokerage services or other advisory service in a merger or specific transaction.

ICICI Securities or its associates might have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the companies mentioned

in the report in the past twelve months.

ICICI Securities encourages independence in research report preparation and strives to minimize conflict in preparation of research report. ICICI Securities or its associates or its analysts did not receive any

compensation or other benefits from the companies mentioned in the report or third party in connection with preparation of the research report. Accordingly, neither ICICI Securities nor Research Analysts

and their relatives have any material conflict of interest at the time of publication of this report.

It is confirmed that Dewang Sanghavi MBA (FIN) and Akshay Kadam MBA (FIN), Research Analysts of this report have not received any compensation from the companies mentioned in the report in the

preceding twelve months.

Compensation of our Research Analysts is not based on any specific merchant banking, investment banking or brokerage service transactions.

ICICI Securities or its subsidiaries collectively or Research Analysts or their relatives do not own 1% or more of the equity securities of the Company mentioned in the report as of the last day of the month

preceding the publication of the research report.

Since associates of ICICI Securities are engaged in various financial service businesses, they might have financial interests or beneficial ownership in various companies including the subject

company/companies mentioned in this report.

It is confirmed that Dewang Sanghavi MBA (FIN) and Akshay Kadam MBA (FIN), Research Analysts do not serve as an officer, director or employee of the companies mentioned in the report.

ICICI Securities may have issued other reports that are inconsistent with and reach different conclusion from the information presented in this report.

Neither the Research Analysts nor ICICI Securities have been engaged in market making activity for the companies mentioned in the report.

We submit that no material disciplinary action has been taken on ICICI Securities by any Regulatory Authority impacting Equity Research Analysis activities.

This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution,

publication, availability or use would be contrary to law, regulation or which would subject ICICI Securities and affiliates to any registration or licensing requirement within such jurisdiction. The securities

described herein may or may not be eligible for sale in all jurisdictions or to certain category of investors. Persons in whose possession this document may come are required to inform themselves of and

to observe such restriction.

tata steel (tatste) | 704 -...

Documents