Tata Steel reported consolidated 2QFY10 results, which were below our estimates. Net sales stood at Rs253.9bn (yoy down 42.5%, qoq up 9%), EBITDA stood at Rs3.8bn (yoy down 95.5%, qoq loss of Rs299mn) and adjusted net loss stood at Rs17.9bn (yoy profit Rs50.3bn, qoq net loss Rs19.9bn). During the quarter, the company reported restructuring/impairment cost of Rs9.1bn. The average realization for Corus for 2QFY10 stood at USD894/t and average cost of production stood at USD990/t, implying a negative EBITDA of USD96/t (qoq –ve EBITDA of USD117/t). As per the management, 2HFY10 is expected to be better than 1HFY10 and expects Corus to be EBITDA neutral in 3QFY10 and to be EBITDA positive in 4QFY10. Corus has turned marginally EBITDA positive in Oct '09. However, we believe Corus will make EBITDA loss of Rs17.9bn for full year FY10. As per the management, the prices in Europe have continued declining trend; however they are currently stabilizing. At the same time, Corus is also taking various measures to reduce cost of production. In 1HFY10, the company has achieved cost savings of USD738mn through "Weathering the storm program". In 2QFY10, EBITDA of Corus was negatively impacted to the tune of USD170mn due to unabsorbed fixed cost of Teeside plant (TCP). As per the management, the worst for TCP is over and they have started signing contracts for selling the slab produced at a rate higher than the cost of production. Currently, Tata Steel has consolidated net debt of USD10.25bn. We expect company to report net loss of Rs14.6bn for FY10 on consolidated basis. At the CMP of Rs545, the stock is trading at 8.9x FY11E EPS of Rs61. On EV/EBITDA basis the stock is trading at 17.2x FY10E EV/EBITDA and at 6.9x FY11E EV/EBITDA; while on P/B basis, the stock is trading at 5.4x FY10E book value and at 3.7x FY11E book value. We are downgrading the stock from HOLD to REDUCE with revised target price of Rs466 (6.5x FY11E EV/EBITDA) (Previous target – Rs409).
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