Tata Steel (Q4 FY12)

CMP Rs400, Target Rs510, Upside 28.2% 

• Consolidated Q4 FY12 revenue increased 2.7% qoq to Rs340bn lower than our estimate of Rs351bn; on account of lower realisations in international operations
• Standalone revenue of Rs94.7bn is higher than our estimate due to higher blended realizations (Rs53,619/ton vs exp. Rs52,740/ton). Higher contribution from the ferro alloy division led to further outperformance
• Standalone operating profit was lower than our expectation due to a one offs in other expenditure and higher employee provisioning
• Adjusted EBIDTA/ton at Corus increased from a loss of -US$1 in Q3 FY12 to US$8 on account of lower raw material costs and increase in volumes
• South East Asia operations improved marginally, EBIDTA/ton jumped from -US$3/ton in Q3 FY12 to US$29/ton
• The consolidated EBIDTA was boosted by an inclusion of US$35mn of full year numbers from its Philllipines subsidiary
• 2.9mtpa blast furnace has been ramping up well and the integrated complex is expected to be fully operational by Q3 FY13.
• Management has guided for an increase of 1mn tons in FY13 as some furnaces would be shutdown due to refractory realigning
• The Benga project is expected to produce 0.85mn tons of coking coal and 0.2mn tons of thermal coal in FY13
• Maintain BUY with a revised 9-month price target of Rs510

Lower realisations in European operations led to an underperformance in topline

During Q4 FY12, Tata Steel’s topline increased 2.7% qoq in rupee terms to Rs340bn, lower than our estimate of Rs351bn. Lower realisations in the European operations led to the underperformance in topline. Standalone Indian operations reported an increase of 9.1% qoq and 3.4% yoy in sales volume to 1.77mn tons. Sales volume at its European operations increased by 6% qoq, but was lower by 14% on a yoy basis to 3.55mn tons, inline with our estimate. Volumes at its South Asian units jumped 9.1% qoq to 0.72mn tons led by a recovery in operations in Thailand. Average blended realizations in India increased 3.6% qoq in rupee terms against our expectation of 2.3%. Realisations in Europe declined 4.5% qoq from US$1,155/ton in Q3 FY12 to US$1,103/ton in Q4 FY12. This was quite lower than our expectation as spot realizations in Europe had risen during the quarter on a qoq basis. The management indicated that this was due to execution of previous quarter orders. Realizations at its South East Asian operations declined 3% qoq to US$861/ton.

Standalone PAT lower than expectations due to one-offs

Tata Steel India registered an increase of 13.1% qoq in operating profit to Rs29.9bn, lower than our estimate of Rs32.2bn. The underperformance in operating profit was due to some one-offs in other expenditure and also due to higher wage provision during the quarter which more than offset the impact of higher realisations. OPM during the quarter remained flat qoq to 31.5%. Raw material costs per ton of steel decreased 3.3% qoq to Rs10,685 due to the impact of lower coking coal prices. Power and fuel costs per ton of steel decreased 6.7% qoq to Rs2,603/ton in Q4 FY12. Employee costs increased 27.7% qoq which was higher than our estimate. EBIDTA/ton for the standalone entity remained flat qoq to Rs20,032 in Q4 FY12. The ferro alloy division managed to report strong numbers mirroring their performance in Q3 FY12. EBIDTA from the ferro alloys decreased marginally from US$29mn in Q3 FY12 to US$26mn in Q4 FY12. Ferro alloy volumes jumped from 0.351mn tons to 0.425mn tons in Q4 FY12.

Consolidated operating profit declined 30% yoy

Tata Steel on a consolidated level, registered a pre-exceptional operating profit of Rs31.8bn (US$672mn) compared to Rs19.1bn (US$366mn) in Q3 FY12. This was lower than our estimate of Rs38.8bn due to one offs in the standalone entity and lower realizations in Tata Steel Europe. During the quarter, European operations registered an adjusted operating profit of US$29mn against an adjusted operating loss of US$4mn in Q3 FY12. Adjusted EBIDTA/ton for European operations stood at US$8/ton, higher than the -US$2 achieved in Q3 FY12. The increase in margins was lower than our expectations due to due to a decrease of US$52/ton in realizations. Raw material costs too declined qoq by US$45/ton in Europe. South East operations managed to register an operating profit of US$21mn on the back of improved performance in the Thailand operations. 

Maintain BUY; earnings to surge over FY12-14E

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 under pressure due to one-off items, we expect Corus to deliver steady EBIDTA/ton over FY13-14. We expect Tata Steel to report strong earnings over the next two years due to 1) impact of new 2.9mtpa capacity 2) impact of restructuring exercise in Europe 3) benefits from overseas raw material projects. After the recent correction in the stock over the last six months, Tata Steel is trading at a discount to its peers. We value the company on a SOTP basis and maintain our Buy rating with a revised nine-month price target of Rs510.