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Asia Pacific Equity Research
15 May 2014
Tata Steel Ltd
Overweight
TISC.BO, TATA IN
Near-term hiccups (Odisha) aside, cyclical upturn in
key markets (Europe, India) in place; remain OW and
increase PT

Price: Rs452.35
Price Target: Rs620.00
Previous: Rs550.00
India
Metals & Mining
Pinakin Parekh, CFA
AC
(91-22) 6157-3588
pinakin.m.parekh@jpmorgan.com
Bloomberg JPMA PAREKH <GO>
J.P. Morgan India Private Limited
Dinesh S. Harchandani, CFA
(91-22) 6157-3583
dinesh.x.harchandani@jpmorgan.com
J.P. Morgan India Private Limited
Neha Manpuria
(91-22) 6157-3589
neha.x.manpuria@jpmorgan.com
J.P. Morgan India Private Limited
Daniel Kang
(852) 2800 8570
daniel.kang@jpmorgan.com
J.P. Morgan Securities (Asia Pacific) Limited
YTD 1m 3m 12m
Abs 6.2% 10.6% 22.0% 48.8%
Rel -6.5% 4.7% 5.1% 28.0%
Tata Steel Ltd (Reuters: TISC.BO, Bloomberg: TATA IN)
Rs in bn, year-end Mar FY12A FY13A FY14E FY15E FY16E
Net Sales (Rs bn) 1,329 1,347 1,387 1,473 1,615
Net Profit (Rs bn) 52 (72) 32 59 78
EPS (Rs) 51.45 (71.39) 31.17 57.96 76.85
Net Profit growth (%) (41.9%) (238.7%) (143.7%) 85.9% 32.6%
ROE 12.1% (17.4%) 8.3% 14.2% 16.6%
P/E (x) 8.8 NM 14.5 7.8 5.9
P/BV (x) 1.0 1.2 1.2 1.0 0.9
EV/EBITDA (x) 7.5 8.2 6.9 5.9 4.9
Source: Company data, Bloomberg, J.P. Morgan estimates.
Company Data
52-week Range (Rs) 454.70-195.30
Market Cap (Rs mn) 458,597
Market Cap ($ mn) 7,686
Price (Rs) 452.35
Date Of Price 14 May 14
3M - Avg daily vol (mn) 6.33
3M - Avg daily val ($ mn) 40.5
BSE30 2,3815.12
Price Target (Rs) 620.00
Price Target End Date 31-Mar-15
See page 13 for analyst certification and important disclosures, including non-US analyst disclosures.
J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that
the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single
factor in making their investment decision.
150
250
350
450
Rs
May-13 Aug-13 Nov-13 Feb-14 May-14

Price Performance
TISC.BO share price (Rs)
BSE30 (rebased)
TATA reported another strong beat in Q4, this time driven by India. We roll
forward our PT to FY16 estimates and remain OW with a revised March-15 PT of
Rs620. Admittedly, near term there is the headwind of potential Odisha disruption
(court order not yet out), but in our view with a new Government likely to be
focused on economic growth, we do not see any disruption to be long lasting, as
without Odisha iron ore, there is unlikely to be much steel available. TATA is
well- positioned to benefit from demand improvement in both India and Europe
with spare capacity available. Debt levels should come down post peak capex in
FY15E. With steel spreads improving, we see upside risks to our Street-high EPS
estimates. We would view any correction on negative news flow as a buying
opportunity.
Q4 wraps up a year of steadily improving earnings trend: Reported PAT
bear Rs10.2bn v/s cons at Rs9.4bn. Consol EBITDA stood at Rs50bn v/s cons
at Rs45bn, driven by a large beat at India operations (EBITDA Rs41bn, and
EBITDA/T at 7-quarter high of Rs17K/T). Implied TATA Europe
EBITDA stood at ~$133mn and EBITDA/T at $33/t v/s JPMe at $43/t. We
are not worried about the miss in EBITDA/T and would highlight the
trend of reducing RM costs and stable steel prices point to further margin
expansion ahead at Europe. TATA Europe FY14 EBITDA stood at ~Rs30bn
Odisha is an overhang but in our view any disruption should be short
lived: The Supreme Court judgment is expected any day and admittedly there is
increasing likelihood of some kind of disruption in Odisha (TATA sources
~75% of its iron ore from there). However, we believe it is likely to be short
lived as: a) the key issue is of deemed extension which can be addressed by the
Govt, and b) any prolonged disruption would sharply impact the broader
economy, which the Govt would like to address
Cycle is improving in Europe, and should pick up in India; TATA well
positioned given spare capacity: We expect the demand environment to pick
up both in Europe and India. TATA Europe should continue to benefit from
spread and volume expansion. JPM FY15E India EBITDA is at Rs14.9K/t
(FY16E Rs13.9K/T) v/s Rs17K/T in Q4. TATA has capacity both in India
(3MT expansion to flow through in FY16E) and Europe to benefit from cyclical
demand pick up.
Net debt reduced q/q to Rs665bn v/s Rs693bn in Q3. FY14 capex stood at
Rs165bn and TATA expects a similar amount in FY15 and reduce only in FY16.
Key risks include a prolonged mining ban in India and slowdown in
Europe.
2
Asia Pacific Equity Research
15 May 2014
Pinakin Parekh, CFA
(91-22) 6157-3588
pinakin.m.parekh@jpmorgan.com
Key catalysts for the stock price: Upside risks to our view: Downside risks to our view:
Continuing recovery in Europe
demand
Stronger-than-expected Corus
EBITDA/t
Ramp up of India EBITDA/t as it
enters seasonally strong Q and price
hikes flow through
Potential sale of non-core
assets/investments
Price hikes in Europe pushing EBITDA higher
India EBITDA/t better than expected from the new
capacity
Limited capex, strong FCF at India to fund capex
plans
INR depreciation, resulting in import substitution
and higher exports
Muted domestic steel demand
Recovery in Europe appears short-lived
High leverage
Lower profitability of expansion given declining iron
ore linkage visibility
Key financial metrics FY13A FY14E FY15E FY16E Valuation and price target basis
Revenues (Rs Mn) 1,347,115 1,386,855 1,472,508 1,615,183 Our revised price target Mar-15 PT is Rs620, based on SOTP
and we value the India operations at 5.7x, 5.0x for Asia and
6.0x for European operations FY16E EBITDA.
Revenue growth (%) 1% 3% 6% 10%
EBITDA (Rs Mn) 123,212 160,167 190,756 218,101
EBITDA margin (%) 9% 12% 13% 14%
Tax rate (%) 105% 51% 37% 32%
Net profit (Rs Mn) -72,375 31,602 58,756 77,909
EPS (Rs) -71.4 31.2 58.0 76.8
EPS growth (%) 86% 33% TATA SOTP
DPS (Rs) 8.0 10.0 10.0 12.0
BVPS (Rs) 366.6 386.3 432.1 493.6
Operating cash flow (Rs mn) 66,557 100,827 137,635 163,211
Free cash flow (Rs mn) -59,928 -54,150 -15,365 72,711
Interest cover (X) 3.0 3.7 4.2 4.7
Net margin (%) -5% 2% 4% 5%
Sales/assets (X) 0.9 0.9 0.9 0.9
Debt/equity (%) 1.76 1.76 1.70 1.50
Net debt/equity (%) 1.47 1.65 1.54 1.23
ROE (%) 0% 8% 14% 17%
Key model assumptions FY13A FY14E FY15E FY16E
Domestic Volumes ('000 T) 7.5 8.5 9.2 10.7
Corus Volumes ('000 T) 13.0 13.8 14.5 15.5
Domestic EBITDA/t (Rs) 14,875 15,101 14,865 13,909
Corus EBITDA/t (USD) 13 35 54 62
Source: J.P. Morgan
estimates.
Source: Company and J.P. Morgan estimates.
Sensitivity analysis EBITDA EPS JPMe vs. consensus, change in estimates
Sensitivity to FY14E FY14E EPS FY14E FY15E
1% chg in India Volumes 0.4% 0.8% JPMe old 57.52 74.73
1% chg in Corus volumes 3.0% 7.0% JPMe new 58.0 76.8
1% chg in India ASP growth 1.3% 2.1% % chg 1% 3%
1% chg in Corus ASP growth 4.5% 13.1% Consensus 44.0 50.8
Source: J.P. Morgan estimates. Source: Bloomberg and J.P. Morgan estimates.
Rs bn Multiple FY15 EBITDA EV
Corus 6.0 57.3 343.9
India 5.7 148.8 848.0
Asia 5.0 12.0 60.0
Total EV 1,252
Net Debt 617
CWIP 34
Pension Deficit 43
Deriv ed Equity Value 626
No of Shares (Mn) 1,014
Target Price 620
3
Asia Pacific Equity Research
15 May 2014
Pinakin Parekh, CFA
(91-22) 6157-3588
pinakin.m.parekh@jpmorgan.com
Q4 a strong beat driven by India as
Europe misses slightly
TATA reported Q4 PAT (Rs10.2bn v/s consensus of Rs9.4bn) and EBITDA (Rs50bn
v/s consensus of Rs45bn), which beat consensus estimates at the consolidated level,
driven by large beat at India. Standalone EBITDA stood at Rs41bn and EBITDA/T
stood at multi-quarter high of Rs17K/T. India volumes increased 6% y/y while
ASP/T increased by ~3% q/q and implied cost/T declined. We are NOT building in
Q4 India EBITDA to sustain in FY15, and our current forecast of EBITDA/T at
Rs15K/t is significantly lower than Q4 levels.
TATA Europe was softer than expected, even as sales volumes were strong at
4.07Mt (+19% y/y). However, implied EBITDA/T stood at ~$33/T v/s JPMe at
$43/T and 3QFY14 at $43/T. As a result, TATA Europe EBITDA at Rs8.17bn
(-5% q/q) was lower than estimated. This was essentially driven by a sharp ~8%
q/q decline in ASP/T, while implied costs/T declined ~7%. Some would view the
miss in Europe as disappointing and question whether TATA is compromising
in realizations in their quest for volumes. TATA highlighted that Q4 had some
sale of semis, which impacted ASP/T and also highlighted that the impact of the
lower raw material prices would flow through with a lag. We are not worried about
the miss in Europe and would point to the trend of continuously improving
operations in Europe with TATA able to sell higher volumes. TATA Europe reported
EBITDA of ~Rs30bn in FY14, a multi-year high, and in our view with European
demand improving and steel spreads holding out, we see the benefit of current steady
steel prices and falling raw material costs to flow through in H1 FY15E in TATA
Europe.
Asia operations were muted, but the EBITDA losses at the smaller units declined
sharply.
FY14 capex stood at a multi-year high of Rs165bn (Rs95bn in India, Rs50bn at
Europe, Rs17bn in mining projects) and TATA has guided to similar spending
in FY15E with reduction in FY16E. From here, EBITDA should increase both
at India and Europe, given a cyclical pick up while capex should reduce
allowing for net debt reduction starting from FY16E.
The stock has run up sharply in sync with the broader markets and we would be
buyers in corrections given the broadly improved economic outlook in Europe and
expectations of a recovery in India.
Key Segment Highlights
India
India reported multi-quarter high EBITDA/t at Rs17K/t driven by: a) sharp increase
in volumes (+19% y/y, +28% q/q) and improved realizations (+7% y/y, +3% q/).
Management attributed the volume improvement (despite weak macroeconomic
environment) to ramp up of 2.9mtpa expansion in 2HFY14. Improved product mix
together with value-added products contributed to better realizations. Management
4
Asia Pacific Equity Research
15 May 2014
Pinakin Parekh, CFA
(91-22) 6157-3588
pinakin.m.parekh@jpmorgan.com
noted that improved volumes have come mostly from domestic markets with exports
making little contribution. Segment-wise, Autos & Special products sales increased
24% q/q and Industrial products sales increased 23% q/q. Branded Retail & Solution
sales increased 10% q/q. For FY15, management guided to similar EBITDA/t as
FY14s average.
Europe
Despite reporting strong volume growth of 28% q/q, +19% y/y, Europe reported an
EBITDA/t of $33/t vs. expectations of $43 and 3QFY14 at $43/t. Management
attributed the lower sequential EBITDA/t to lower spreads during the quarter as
well as higher sale of semis. Management noted that spreads had come down to $175
in 4Q vs. $190 in 3Q, with lower raw material prices impacting steel realizations.
Management indicated that spreads should improve from current quarters as lower
raw materials prices flow through. Realizations were down 7% q/q, 6% y/y. We are
not worried about the miss in EBITDA/T and would highlight the trend of
reducing RM costs and stable steel prices point to further margin expansion
ahead at Europe. TATA Europe FY14 EBITDA stood at ~Rs30bn
SE Asia
SE Asia reported volumes of 1.07MT, increasing 34% y/y, a modest decline
sequentially. EBITDA declined significantly to $13Mn, down 41% q/q and 69% y/y.
Management noted the import pricing pressures in the region as well as political
uncertainty in Thailand impacting operational performance. Management
highlighted that key plant modernization and automation projects have been
completed in Singapore. Together with restructuring of operations as well as
optimization of variable costs at Thailand (through increased domestic scrap
procurement), SE Asia should see improved operational performance going forward.
Debt
Net debt reduced q/q to Rs665bn v/s Rs693bn in Q3. FY14 capex stood at Rs165bn
and TATA expects a similar amount in FY15. Management noted that debt should
peak in FY15 as it incurs capex on its Kalinganagar project in Odisha. Post FY15,
debt should come down. TATA also highlighted that they continue to evaluate non-
core assets for monetization. Management also highlighted that major debt
repayments are due at end of FY16. In order of preference, management noted that
they prefer internal accruals, non-core asset sales and debt in that order.
Projects
KPO: Project work continues on track to commission by 4QFY15. TATA has so far
spent Rs163.5bn on KPO, of which Rs80bn was spent in FY14. Management expects
to incur most of the remaining ~Rs90bn capex in FY15. Management also indicated
that they might invest in certain downstream projects in KPO plant to provide value-
added products.
Benga Project, Mozambique: TATA noted that logistics issues and security
concerns impacted production in 4QFY14. For FY14, 0.86MT of hard coking coal
has been shipped with management targeting 1MT in FY15
Direct iron ore shipping project, Canada: Shipments of 240kt in FY14 with
production of 1MT. Management noted that logistics infrastructure is now in place
5
Asia Pacific Equity Research
15 May 2014
Pinakin Parekh, CFA
(91-22) 6157-3588
pinakin.m.parekh@jpmorgan.com
and shipments would start from July, post winter shutdown. Management indicated
that with necessary approvals in place, construction of processing complex has
begun.
Table 1: Tata Steel: Segmental Results
4QFY13 3QFY14 4QFY14 % y/y % q/q
Revenues Rs Mn
Europe 191,660 207,090 243,760 27% 18%
SE Asia 34,860 45,370 43,650 25% -4%
India 107,710 101,430 121,910 13% 20%
Others 12,270 13,470 14,960 22% 11%
Total Sales 346,500 367,360 424,280 22% 15%
EBITDA Rs Mn
Europe 6,130 8,600 8,170 33% -5%
SE Asia 2,240 1370 800 -64% -42%
India 37,140 31,310 40,520 9% 29%
Others (1,830) -2070 -320 -83% -85%
Total EBITDA 43,680 39,210 49,170 13% 25%
Deliveries Volumes MT
Europe 3.4 3.2 4.1 19% 28%
SE Asia 0.8 1.1 1.1 34% -2%
India 2.3 2.1 2.4 6% 16%
Total Volumes 6.6 6.4 7.6 15% 19%
Realization per MT
Europe 56,041 64,918 59,892 7% -8%
SE Asia 43,575 41,624 40,794 -6% -2%
India 47,262 49,000 50,585 7% 3%
Avg Steel
Realization/MT 52,820 57,852 56,196 6% -3%
EBITDA/MT
Europe 1,792 2,696 2,007 12% -26%
SE Asia 2,800 1,257 748 -73% -41%
India 16,297 15,126 16,813 3% 11%
Cost/MT
Europe 54,249 62,223 57,885 7% -7%
SE Asia 40,775 40,367 40,047 -2% -1%
India 30,965 33,874 33,772 9% 0%
Source: Company reports.
Table 2: TATA EBITDA segment wise quarterly trend (Rs MM)
Rs MM India Europe Asia Others Consol
3QFY13 25,250 -4,280 1,440 110 22,520
4QFY13 37,140 6,130 2,240 -1,830 43,680
1QFY14 28,970 7,770 930 -120 37,550
2QFY14 32,020 5,540 1,290 -1,010 37,840
3QFY14 31,310 8,600 1,370 -2,070 39,210
4QFY14 40,520 8,170 800 -320 49,170
Source: Company reports.
Table 3: Tata Steel Consolidated Results
Rs Mn, % 4QFY13 3QFY14 4QFY14 % y/y % q/q
Net Sales 346,505 367,358 424,281 22% 15%
EBITDA 43,689 40,065 50,111 15% 25%
Interest 9,947 11,084 11,694 18% 5%
Depreciation 14,696 15,221 14,719 0% -3%
Other Income (679) 181 1,117 -265% 516%
PBT 18,368 13,942 24,816 35% 78%
Tax 11,015 8,951 13,645 24% 52%
Recurring PAT 7,353 4,991 11,170 52% 124%
Reported PAT -65,285 5,032 10,359 -116% 106%
EBITDA Margin 13% 11% 12%
Net Margin 2% 1% 3%
EBIT Margin 8% 7% 8%
Source: Company reports.
6
Asia Pacific Equity Research
15 May 2014
Pinakin Parekh, CFA
(91-22) 6157-3588
pinakin.m.parekh@jpmorgan.com
Figure 1: TATA: Standalone 3QFY14 Results: QoQ Variation Figure 2: TATA: Consol 3QFY14 Results: QoQ Variation
Source: Company reports. Source: Company reports.
Figure 3: TATA's India Volume
Source: Company reports.
Figure 4: TATA's India EBITDA/MT (Rs/MT)
Source: Company reports.
Figure 5: TATA's Europe Volume
Source: Company reports.
Figure 6: TATA's Europe EBITDA/MT ($/MT)
Source: Company reports.
25%
27%
29%
31%
33%
35%
37%
39%
41%
15,000
20,000
25,000
30,000
35,000
40,000
45,000
India EBITDA (Rs MM) Margin
0%
2%
4%
6%
8%
10%
12%
14%
16%
0
10,000
20,000
30,000
40,000
50,000
60,000
Consol EBITDA (Rs MM) Margin
1.62
1.77
1.59
1.73
1.89
2.28
2.01
2.04
2.07
2.41
-5%
0%
5%
10%
15%
20%
25%
30%
35%
1.20
1.40
1.60
1.80
2.00
2.20
2.40
2.60
India Volume % Chg
16,218
16,921
17,483
14,545
13,366
14,498
14,136
14,402
14,183
17,120
13,000
13,500
14,000
14,500
15,000
15,500
16,000
16,500
17,000
17,500
18,000
3
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India (Rs/MT)
3.35
3.55
3.21
3.42
3.02
3.42
3.14
3.46
3.19
4.07
-20%
-15%
-10%
-5%
0%
5%
10%
15%
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25%
3.00
3.20
3.40
3.60
3.80
4.00
4.20
Europe Volume % Chg
-44
8
35
-2
-26
33
44
26
43
33
-50
-40
-30
-20
-10
0
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Europe
7
Asia Pacific Equity Research
15 May 2014
Pinakin Parekh, CFA
(91-22) 6157-3588
pinakin.m.parekh@jpmorgan.com
Figure 7: TATA's Consol Interest Expense and Int cover
Source: Company reports.
Figure 8: TATA's Overseas Interest Expense and Int cover
Source: Company reports.
Figure 9: Tata Steel India sales growth vs. India steel industry consumption growth
Source: Company reports, JPC India.
Figure 10: Tata Steel Consolidated tax rate trend (%)
Source: Company reports.
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
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Consol Int Exp (Rs MM)- LHS Consol EBITDA/Int (x) - RHS
-6.0
-4.0
-2.0
0.0
2.0
4.0
6.0
8.0
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
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Overseas Int (Rs MM) - LHS Overseas EBITDA/Int
-5%
0%
5%
10%
15%
20%
25%
30%
35%
3QFY12 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 2QFY14 3QFY14 4QFY14
TATA India Steel Consumption
27%
44%
87%
0%
83%
56%
-284%
60%
24% 32%
64% 55%
-400%
-300%
-200%
-100%
0%
100%
200%
300%
400%
Consol Tax rate
TATA has continued to grow
ahead of market in India over the
last seven quarters.
Consolidated tax rates continue
to be volatile. 4Q tax rates were
impacted by an increase in tax in
TSI and reduction of deferred tax
assets in TSE.
8
Asia Pacific Equity Research
15 May 2014
Pinakin Parekh, CFA
(91-22) 6157-3588
pinakin.m.parekh@jpmorgan.com
Figure 11: Tata Europe Pension Surplus (GBP Mn)
Source: Company reports.
Figure 12: Tata Steel Consolidated Net Debt trend (Rsbn)
Source: Company reports.
Figure 13: Tata Steel FII and DII ownership trends
Source: BSE website
106
90
211
38 34
78
283
428
242
301 298
0
50
100
150
200
250
300
350
400
450
Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14
Pension Surplus (GBP MM)
451
505
477
540
552
580
554
613
643
701
673
400
450
500
550
600
650
700
750
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2
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1
4
2
Q
F
Y
1
4
3
Q
F
Y
1
4
4
Q
F
Y
1
4
Net Debt Rsbn
20%
22%
24%
26%
28%
30%
10%
14%
18%
22%
J
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FII - LHS DIIs - RHS
Pension surplus remained at
~GNP300MM
Net debt decreased during the
quarter despite additional
borrowing of Rs41bn on account
of positive forex impact and
increase in cash.
Management expects debt to
peak in FY15 with its investment
in KPO and should decline from
FY16 onwards.
9
Asia Pacific Equity Research
15 May 2014
Pinakin Parekh, CFA
(91-22) 6157-3588
pinakin.m.parekh@jpmorgan.com
Figure 14: TATA EV/EBITDA bands (x)
Source: Company data, Bloomberg, J.P. Morgan estimates.
Figure 15: Global Steel CY14/FY15E EV/EBITDA
Source: Company data, Bloomberg, J.P. Morgan estimates.
Investment Thesis, Valuation and Risks
Tata Steel Ltd (Overweight; Price Target: Rs620.00)
Investment Thesis
TATA remains our top pick despite the stock being up 30%+ since mid-March vs.
the SENSEX up 8% over the same period. In our view, expectations of a potential
improvement in European metals demand are positive for TATAs European
operations. We believe an improving Europe over the next two years implies further
5x
6x
7x
0
100
200
300
400
500
600
700
800
900
1000
Jan-93 Dec-94 Nov-96 Oct-98 Sep-00 Aug-02 Jul-04 Jun-06 May-08 Apr-10 Mar-12 Jan-14
Price (Rs) 5x 6x 7x
3.4
3.8 3.9
4.7
5.0
5.1 5.2 5.2
5.3
5.4
5.8
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6.1
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9.0
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10
Asia Pacific Equity Research
15 May 2014
Pinakin Parekh, CFA
(91-22) 6157-3588
pinakin.m.parekh@jpmorgan.com
a re-rating of stock. In addition, we believe domestic demand should remain stable
with limited new capacity addition from major players. Potential investment sales to
de-lever could provide further upside.
Valuation
Our revised PT of Rs620 is based on FY16 estimates, now rolled forward to March-
15. We use a target multiple for TATA Europe of 6x EV/EBITDA, given the
visibility in Europe steel demand. We estimate TATA is trading at a significant
discount to MT on headline FY15E estimates (TATA trades at 5.2x FY15
EV/EBITDA vs. MT at 5.8x (using Bloomberg consensus estimates for MT) and the
discount widens if we were to adjust for a) the CWIP sitting on the books relating to
Orissa and b) the TATA Motors stake. Adjusted for CWIP, TATA trades at 4.2x
FY15E EV/EBITDA. In our view, the discount between TATA and MT should
narrow, given TATA is also levered to a European recovery.
Multiple (x) FY 16 EBITDA (Rs bn) EV (Rs bn)
Europe 6.0 57.3 343.9
India 5.7 148.8 848.0
Asia 5.0 12.0 60.0
Total EV 1,252
Net Debt 617
CWIP 34
Pension Deficit 43
Derived Equity Value 626
No of Shares (MM) 1,013.8
Target Price (Rs/share) 620
Source: Company reports and J.P. Morgan estimates. Note: Adjusted for CWIP.
Risks to Rating and Price Target
Key risks (other than macro economic weakness) include a sharp decline in India
profitability, weakness in steel price and a decline in European demand.
11
Asia Pacific Equity Research
15 May 2014
Pinakin Parekh, CFA
(91-22) 6157-3588
pinakin.m.parekh@jpmorgan.com
Tata Steel Ltd: Summary of Financials
Income Statement Cash flow statement
Rs in billions, year end Mar FY13 FY14E FY15E FY16E Rs in billions, year end Mar FY13 FY14E FY15E FY16E
Revenues 1,347 1,387 1,473 1,615 Net income (Pre exceptionals) (72) 32 59 78
% change Y/Y 1.4% 2.9% 6.2% 9.7% Depr. & amortization 56 57 62 66
EBITDA 123 160 191 218 Change in working capital 9 12 17 19
% change Y/Y (0.8%) 30.0% 19.1% 14.3% Cash flow from operations 67 101 138 163
EBITDA margin 9.1% 11.5% 13.0% 13.5%
EBIT 67 103 129 152 Net Capex (126) (155) (153) (91)
% change Y/Y (14.6%) 52.5% 25.0% 18.0% Free cash flow (60) (54) (15) 73
EBIT Margin 5.0% 7.4% 8.7% 9.4%
Net Interest (37) (38) (35) (37) Equity raised/(repaid) (5) 0 0 0
Earnings before tax 31 65 94 115 Debt raised/(repaid) 60 36 57 6
% change Y/Y (39.1%) 109.9% 44.8% 22.8% Other (52) (34) 0 0
Tax (32) (33) (35) (37) Dividends paid (9) (12) (12) (16)
as % of EBT 105.0% 51.1% 37.2% 32.2% Beginning cash 108 99 35 64
Net income (Pre exceptionals) (72) 32 59 78 Ending cash 99 35 64 127
% change Y/Y (238.7%) (143.7%) 85.9% 32.6% DPS 7.66 10.18 10.78 13.66
Shares outstanding 1,014 1,014 1,014 1,014
EPS (reported) (71.39) 31.17 57.96 76.85
% change Y/Y (238.7%) (143.7%) 85.9% 32.6%
Balance sheet Ratio Analysis
Rs in billions, year end Mar FY13 FY14E FY15E FY16E Rs in billions, year end Mar FY13 FY14E FY15E FY16E
Cash and cash equivalents 99 35 64 127 EBITDA margin 9.1% 11.5% 13.0% 13.5%
Short term investments 8 8 8 8 Operating margin 5.0% 7.4% 8.7% 9.4%
Accounts receivable 140 86 91 98 Net margin (5.4%) 2.3% 4.0% 4.8%
Inventories 241 290 283 296
Others 55 55 55 55 Sales growth 1.4% 2.9% 6.2% 9.7%
Current assets 542 473 500 583 Net profit growth (238.7%) (143.7%) 85.9% 32.6%
EPS growth (238.7%) (143.7%) 85.9% 32.6%
Net fixed assets 692 790 881 905
Total Assets 1,469 1,498 1,615 1,723 Interest coverage (x) 3.4 4.2 5.4 5.9
Net debt to total capital 58.5% 61.3% 59.7% 54.4%
Liabilities Net debt to equity 147.1% 165.1% 153.9% 123.3%
Short-term loans 191 191 191 191 Sales/assets 0.9 0.9 0.9 1.0
Payables 218 269 281 317 Assets/equity 3.5 3.9 3.8 3.6
Others 114 69 72 75 ROE (17.4%) 8.3% 14.2% 16.6%
Total current liabilities 523 530 544 583 ROCE (0.3%) 4.8% 7.1% 8.4%
Long-term debt 462 498 555 561
Other liabilities 96 62 62 62
Total Liabilities 1,081 1,089 1,161 1,206
Shareholder's equity 372 392 438 500
BVPS 366.56 386.28 432.10 493.58
Source: Company reports and J.P. Morgan estimates.
12
Asia Pacific Equity Research
15 May 2014
Pinakin Parekh, CFA
(91-22) 6157-3588
pinakin.m.parekh@jpmorgan.com
JPM Q-Profile
Tata Steel Limited (INDIA / Materials)
As Of: 09-May-2014 Quant_Strategy@jpmorgan.com
Local Share Price Current: 399.95 12 Mth Forward EPS Current: 44.49
Earnings Yield (& local bond Yield) Current: 11% Implied Value Of Growth* Current: 19.27%
PE (1Yr Forward) Current: 9.0x Price/Book Value Current: 1.0x
ROE (Trailing) Current: -12.57 Dividend Yield (Trailing) Current: 2.00
Summary
Tata Steel Limited 6480.70 As Of:
INDIA 4.690946 SEDOL 6101156 Local Price: 399.95
Materials Metals & Mining EPS: 44.49
Latest Min Max Median Average 2 S.D.+ 2 S.D. - % to Min % to Max % to Med % to Avg
12mth Forward PE 8.99x 1.77 15.39 7.93 7.98 12.44 3.52 -80% 71% -12% -11%
P/BV (Trailing) 0.96x 0.38 5.01 1.89 2.01 4.16 -0.14 -60% 424% 98% 111%
Dividend Yield (Trailing) 2.00 1.18 10.40 2.66 2.94 5.90 -0.01 -41% 421% 33% 47%
ROE (Trailing) -12.57 -17.18 50.00 30.77 26.31 68.67 -16.06 -37% 498% 345% 309%
Implied Value of Growth 19.3% -3.46 0.57 0.03 -0.08 0.99 -1.14 -1895% 196% -84% -141%
Source: Bloomberg, Reuters Global Fundamentals, IBES CONSENSUS, J.P. Morgan Calcs * Implied Value Of Growth = (1 - EY/Cost of equity) where cost of equity =Bond Yield + 5.0% (ERP)
9-May-14
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12Mth fwd EY India BY Proxy
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13
Asia Pacific Equity Research
15 May 2014
Pinakin Parekh, CFA
(91-22) 6157-3588
pinakin.m.parekh@jpmorgan.com
Analyst Certification: The research analyst(s) denoted by an AC on the cover of this report certifies (or, where multiple research
analysts are primarily responsible for this report, the research analyst denoted by an AC on the cover or within the document
individually certifies, with respect to each security or issuer that the research analyst covers in this research) that: (1) all of the views
expressed in this report accurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part of
any of the research analyst's compensation was, is, or will be directly or indirectly related to the specific recommendations or views
expressed by the research analyst(s) in this report. For all Korea-based research analysts listed on the front cover, they also certify, as per
KOFIA requirements, that their analysis was made in good faith and that the views reflect their own opinion, without undue influence or
intervention.
Important Disclosures
Client: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as clients: Tata Steel Ltd.
Client/Non-Investment Banking, Securities-Related: J.P. Morgan currently has, or had within the past 12 months, the following
company(ies) as clients, and the services provided were non-investment-banking, securities-related: Tata Steel Ltd.
Client/Non-Securities-Related: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as clients,
and the services provided were non-securities-related: Tata Steel Ltd.
Investment Banking (next 3 months): J.P. Morgan expects to receive, or intends to seek, compensation for investment banking
services in the next three months from Tata Steel Ltd.
Non-Investment Banking Compensation: J.P. Morgan has received compensation in the past 12 months for products or services
other than investment banking from Tata Steel Ltd.
Company-Specific Disclosures: Important disclosures, including price charts, are available for compendium reports and all J.P. Morgan
covered companies by visiting https://jpmm.com/research/disclosures, calling 1-800-477-0406, or e-mailing
research.disclosure.inquiries@jpmorgan.com with your request. J.P. Morgans Strategy, Technical, and Quantitative Research teams may
screen companies not covered by J.P. Morgan. For important disclosures for these companies, please call 1-800-477-0406 or e-mail
research.disclosure.inquiries@jpmorgan.com.
Date Rating Share Price
(Rs)
Price Target
(Rs)
21-Sep-07 N 654.72 740.00
15-May-08 N 881.90 800.00
11-Aug-08 N 651.20 740.00
29-Aug-08 N 600.35 690.00
17-Oct-08 N 269.75 290.00
03-Dec-08 N 164.70 155.00
29-Jun-09 N 397.15 415.00
03-Sep-09 N 416.45 425.00
30-Oct-09 N 467.65 475.00
15-Jan-10 N 645.15 605.00
14-Nov-10 N 606.95 665.00
14-Jan-11 OW 637.55 820.00
23-May-11 OW 559.40 785.00
09-Sep-11 OW 476.90 685.00
11-Nov-11 OW 429.85 630.00
03-Feb-12 OW 467.50 605.00
19-Jul-12 OW 411.65 590.00
14-Aug-12 OW 406.10 580.00
09-Nov-12 OW 390.55 530.00
14-Feb-13 OW 384.90 505.00
20-May-13 OW 315.35 530.00
16-Jul-13 OW 251.60 455.00
14-Aug-13 OW 241.40 500.00
14-Nov-13 OW 352.45 525.00
07-Feb-14 OW 361.25 550.00
0
254
508
762
1,016
1,270
1,524
Price(Rs)
Sep
06
Mar
08
Sep
09
Mar
11
Sep
12
Mar
14

Tata Steel Ltd (TISC.BO, TATA IN) Price Chart
N Rs690 N Rs475 OW Rs605OW Rs530 OW Rs455 OW Rs550
N Rs740 N Rs155 N Rs425 OW Rs820OW Rs630OW Rs580OW Rs530 OW Rs525
N Rs740N Rs800 N Rs290N Rs415 N Rs605 N Rs665 OW Rs785 OW Rs685OW Rs590 OW Rs505 OW Rs500
Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends.
Initiated coverage Sep 21, 2007.
14
Asia Pacific Equity Research
15 May 2014
Pinakin Parekh, CFA
(91-22) 6157-3588
pinakin.m.parekh@jpmorgan.com
The chart(s) show J.P. Morgan's continuing coverage of the stocks; the current analysts may or may not have covered it over the entire
period.
J.P. Morgan ratings or designations: OW = Overweight, N= Neutral, UW = Underweight, NR = Not Rated
Explanation of Equity Research Ratings, Designations and Analyst(s) Coverage Universe:
J.P. Morgan uses the following rating system: Overweight [Over the next six to twelve months, we expect this stock will outperform the
average total return of the stocks in the analysts (or the analysts teams) coverage universe.] Neutral [Over the next six to twelve
months, we expect this stock will perform in line with the average total return of the stocks in the analysts (or the analysts teams)
coverage universe.] Underweight [Over the next six to twelve months, we expect this stock will underperform the average total return of
the stocks in the analysts (or the analysts teams) coverage universe.] Not Rated (NR): J.P. Morgan has removed the rating and, if
applicable, the price target, for this stock because of either a lack of a sufficient fundamental basis or for legal, regulatory or policy
reasons. The previous rating and, if applicable, the price target, no longer should be relied upon. An NR designation is not a
recommendation or a rating. In our Asia (ex-Australia) and U.K. small- and mid-cap equity research, each stocks expected total return is
compared to the expected total return of a benchmark country market index, not to those analysts coverage universe. If it does not appear
in the Important Disclosures section of this report, the certifying analysts coverage universe can be found on J.P. Morgans research
website, www.jpmorganmarkets.com.
Coverage Universe: Parekh, Pinakin: ACC Limited (ACC.BO), Ambuja Cements Limited (ABUJ.BO), Coal India (COAL.BO),
Grasim Industries Ltd (GRAS.BO), Hindalco Industries (HALC.BO), JSW Steel (JSTL.BO), NMDC (NMDC.NS), National Aluminium
Co Ltd (NALU.BO), Sesa Sterlite (SESA.NS), Steel Authority of India Ltd (SAIL.BO), Tata Steel Ltd (TISC.BO), UltraTech Cement Ltd
(ULTC.BO)
J.P. Morgan Equity Research Ratings Distribution, as of March 31, 2014
Overweight
(buy)
Neutral
(hold)
Underweight
(sell)
J.P. Morgan Global Equity Research Coverage 44% 44% 11%
IB clients* 58% 49% 40%
JPMS Equity Research Coverage 45% 48% 7%
IB clients* 78% 67% 60%
*Percentage of investment banking clients in each rating category.
For purposes only of FINRA/NYSE ratings distribution rules, our Overweight rating falls into a buy rating category; our Neutral rating falls into a hold
rating category; and our Underweight rating falls into a sell rating category. Please note that stocks with an NR designation are not included in the table
above.
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15
Asia Pacific Equity Research
15 May 2014
Pinakin Parekh, CFA
(91-22) 6157-3588
pinakin.m.parekh@jpmorgan.com
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16
Asia Pacific Equity Research
15 May 2014
Pinakin Parekh, CFA
(91-22) 6157-3588
pinakin.m.parekh@jpmorgan.com
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