Tata Steel Ltd.
Strong performance, bleak outlook
HOLD
CMP: Rs159 Target Price: Rs143
Tata Steel reported 3QFY09 cosolidated results, which were significantly ahead of our estimates. Net sales stood at Rs331.9bn (yoy up 4.1%, qoq down 4.9%) driven by better than expected average realization for Corus which stood at USD1,250/t as against our estimates of USD820/t. The higher realizations lead to better operating performance with EBITDA at Rs28.6bn (yoy down 27.5%, qoq down 65.4%) and adjusted PAT at Rs9.5bn (yoy down 26.3%, qoq down 81.2%). Tata Steel reported adjusted FDEPS of Rs10.9. During the quarter, the company reported forex loss of Rs2bn. The cost of production for Corus stood at USD1,168/t as against our estimates of USD1,000/t. Higher realizations during Oct-Nov '08 lead to better average realizations for the quarter. However, 4QFY09 is expected to witness drop in average realization as comapred to 3QFY09. At the same time, Corus is also taking various measures to reduce cost of production. The outlook on Indian operations is optimistic, with management expectations of higher volumes in 4QFY09 to the tune of 1.5mt as compared to 1.1mt in 3QFY09. However, the outlook for Tata Steel UK operations seems to be under some pressure with auto and construction market witnessing a drop of 40-50% in demand. Tata Steel has reported actuarial loss on pension fund of Rs42.5bn which has been adjusted through reserves. Currently, Tata Steel has consolidated net debt of USD11.5bn. At the CMP of Rs159, the stock is trading at 0.7x FY09E book value and at 0.6x FY10E book value. We are upgrading the stock from REDUCE to HOLD with target price of Rs143 (0.5x FY10E book value). --~--~---------~--~----~------------~-------~--~----~
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