Price band Rs594-610

Tata Steel is among our top picks in the metals space. The company is issuing 57mn shares (6.3% dilution) at the price band of Rs594-610, effectively raising Rs34.8bn at the upper band. Tata Steel plans to utilize the issue proceeds for its Jamshedpur plant expansion, debt repayment and investments in international raw material projects.   

We believe domestic operations would continue to be the earnings driver for Tata Steel over the next two years. Even though near term earnings in Corus would remain zunder pressure, we expect Corus to deliver an EBIDTA/ton of US$52 in FY12 and US$63/ton in FY13. We expect Tata Steel to report strong earnings in FY13 due to 1) full impact of new 2.9mtpa capacity 2) volume growth in European operations 3) benefits from overseas raw material projects. At the upper band of Rs610, Tata Steel would trade at 8.2x P/E and 5.9x EV/EBIDTA on FY12E, which is at a discount to its peers. We value the company on a SOTP basis and recommend ‘Subscribe’ to the issue with a fair value of Rs740.

Domestic margins to benefit from integrated business model

Over the years, Tata Steel’s domestic operations have exhibited robust performance on the back of high raw material integration and superior product mix. The company, in the last three quarters, has achieved an EBIDTA/ton of >US$450/ton, the highest among its peers. For FY12, we expect Tata Steel India to continue to report robust EBITDA/ton on the back of strong steel prices. This coupled with volume growth from the new facility would boost earnings by 53% over FY10-13E.

European operations to remain EBIDTA positive

The strong performance in Europe has been due to a combination of higher realizations, higher utilization levels and a host of cost efficiency initiatives. In FY12, we expect margins to remain stable in the band of US$50-55/ton as the benefits from the various cost saving benefits and a rebound in the steel cycle would be negated by higher raw material prices. However, in FY13, we estimate that margins will expand as it would benefit from captive iron ore and coking coal from overseas projects and higher volumes.