Tata Steel Ltd (Q1 FY15)

CMP Rs535, Target Rs630, Upside 17.8%
 
-  Tata Steel consolidated results were inline with our estimate as the impact of lower volumes was offset by higher realisations
-  Standalone operational results were marginally lower than estimate due to a jump in employee costs on a qoq basis
-  Adjusted EBIDTA/ton at Corus increased to US$52, higher than our estimate of US$42/ton on account of strong steel realisations in US Dollar
-  Performance of South East Asia operations remained below par due to dumping of cheap steel from China
-  Consolidated operating profit stood at Rs42.7bn, higher by 15.8% yoy, inline with our estimate of Rs42.2bn
-  Maintain BUY on expectations of a strong performance in Europe with a revised price target of Rs630

Average blended realizations in India were higher by 1.5% on a qoq in rupee terms due to lower contribution from the FAMD division. Net steel realisations were higher by 1.2% qoq as the impact of higher long products was some offset by lower flat product prices. An increase in share of Value added Products and higher retails sales also led to an increase in steel prices. The management expects prices to remain around current levels in the near term. Realisations in Europe jumped sharply by 11.8% qoq in dollar terms from US$969/ton in Q4 FY14 to US$1,084/ton due to weak GBP against the Dollar. The management indicated that steel prices are in a downward trend led by idle capacity in the region and lower raw material costs. Realizations at its South East Asia operations declined for the fourth consecutive quarter in dollar terms from US$814/ton in Q1 FY14 and US$660/ton in Q4 FY14 to US$626/ton. Steel prices in South East Asia were under pressure from the cheaper imports from China.
 
Higher employee cost curtail the growth in operating profit
Tata Steel India registered a 14.9% yoy growth in operating profit to Rs32.5bn, marginally lower than our estimate of Rs33.4bn. The underperformance in operating profit was largely due to a sharp increase in employee costs and higher power costs. Employee costs which were declining in the previous two quarters increased on a qoq basis to Rs11.3bn due to higher actuarial provisioning and salary hikes. Raw material costs per ton decreased from Rs12,837/ton in Q4 FY14 to Rs10,897/ton due to lower costs of landed coking coal. However, the share of imported coal continued to increase with the increase in steel production. Power costs per ton of steel increased on a qoq basis by 34%. Other expenditure per ton of steel declined 1.3% qoq due to one-off costs and lower stores & spares. Operating profit per ton for the domestic operations decreased by 9.1% qoq to Rs15,504/ton, inline with our estimate.  
 
Blended per ton cost analysis (Standalone)

	Q1 FY15	Q1 FY14	% yoy	Q4 FY14	% qoq
Steel production (mn tons)	2.25	2.15	4.7	2.38	(5.5)
Steel sales (mn tons)	2.10	2.00	5.0	2.41	(12.9)
Sales as a % of production	93.3	93.0		101.3
Net realisations (Rs/ton)	49,849	47,277	5.4	50,586	(1.5)
Cost per ton (Rs/ton)
RM/ton	10,897	10,596	2.8	12,837	(15.1)
Staff cost	5,382	5,014	7.3	3,309	62.6
Power and fuel costs	3,435	3,263	5.3	2,563	34.0
Other expenditure	14,631	14,233	2.8	14,828	(1.3)
Total cost	34,345	33,105	3.7	33,537	2.4
Operating profit/ton	15,504	14,172	9.4	17,049	(9.1)

Source: Company, India Infoline Research

Higher realisations at Europe offset the impact of lower volumes and weak South East Asia business
Tata Steel on a consolidated level registered an operating profit of Rs42bn, higher by 15.8% yoy. This was inline with our estimate as the impact of higher steel realisations was offset by lower volumes and weak South East Asia business performance. During the quarter, European operations registered an adjusted operating profit of US$166mn against our expectations of US$156mn. EBIDTA/ton for European operations stood at US$52/ton, higher by 17.4% qoq and above our estimate of US$42/ton. The increase in operating profit has been largely due to higher realisations as raw material costs remained flat on a qoq basis. The management expects the full impact of this to be felt in Q2 FY15. The management expects the margins to improve in Q2 FY15 as the spread has increased during the quarter. South East operations registered a 62.5% qoq decrease in operating profit due to lower realisations and pressure from cheap Chinese imports.          
 
Company performance

Tata Steel Standalone	Q1 FY15	Q1 FY14	% yoy	Q4 FY14	% qoq
Sales volume (mn tons)	2.10	2.00	5.0	2.41	(12.9)
Realisation (Rs/ton)	49,848	47,275	5.4	50,585	(1.5)
Revenue (Rs mn)	104,680	94,550	10.7	121,910	(14.1)
EBIDTA (Rs mn)	32,660	28,970	12.7	40,520	(19.4)
OPM (%)	31.2	30.6	56 bps	33.2	-204 bps
EBIDTA/ton (Rs)	15,552	14,485	7.4	16,813	(7.5)
Tata Steel UK - Corus	Q1 FY15	Q1 FY14	% yoy	Q4 FY14	% qoq
Sales volume (mn tons)	3.20	3.14	1.9	4.07	(21.4)
Realisation (Rs/ton)	64,816	58,701	10.4	59,892	8.2
Revenue (Rs mn)	207,410	184,320	12.5	243,760	(14.9)
EBIDTA (Rs mn)	9,950	7,770	28.1	8,170	21.8
OPM (%)	4.8	4.2	58 bps	3.4	145 bps
EBIDTA/ton (Rs)	3,109	2,475	25.7	2,007	54.9
South East Asian operations	Q1 FY15	Q1 FY14	% yoy	Q4 FY14	% qoq
Sales volume (mn tons)	1.08	0.86	25.6	1.07	0.9
Realisation (Rs/ton)	37,454	45,442	(17.6)	40,794	(8.2)
Revenue (Rs mn)	40,450	39,080	3.5	43,650	(7.3)
EBIDTA (Rs mn)	300	930	(67.7)	800	(62.5)
OPM (%)	0.7	2.4	-164 bps	1.8	-109 bps
EBIDTA/ton (Rs)	278	1,081	(74.3)	748	(62.8)

Source: Company, India Infoline Research

Turn around in Corus and strong domestic business would lead to rerating
We believe domestic operations would continue to be the earnings driver for Tata Steel over the next two years. The European operations would continue to register the revival in profitability over the next two years on account of a revival in demand in the region and further cost savings. We expect Tata Steel to report strong earnings over the next two years due to 1) incremental volumes from the Jamshedpur unit in FY15 and commissioning of Kalinganagar operations in FY16 2) impact of restructuring exercise in Europe and lower raw material prices 3) marginal revival in demand in the European region 4) benefits from overseas raw material projects. Tata Steel remains our preferred pick in the sector on the back of strong performance registered in the last one year and due to the various earnings driver for the company over the next two years. We maintain our BUY rating on the stock with a revised price target of Rs630.
 
Financial Summary

Y/e 31 Mar (Rs m)	FY13	FY14	FY15E	FY16E
Revenues	1,347,115	1,486,136	1,539,366	1,623,441
yoy growth (%)	1.4	10.3	3.6	5.5
Operating profit	123,211	163,833	191,001	214,696
OPM (%)	9.1	11.0	12.4	13.2
Pre-exceptional PAT	3,322	35,949	41,740	55,927
Reported PAT	(70,577)	35,949	67,990	55,927
yoy growth (%)	-	-	89.1	(17.7)
Adj. EPS (Rs)	3.4	37.0	43.0	57.6
P/E (x)	156.5	14.5	12.5	9.3
Price/Book (x)	1.5	1.3	1.1	1.0
EV/EBITDA (x)	9.0	7.8	6.7	5.8
Debt/Equity (x)	1.7	1.9	1.6	1.4
RoE (%)	0.9	9.6	9.6	11.5
RoCE (%)	6.7	9.4	10.2	11.2

Source: Company, India Infoline Research