15 May 2014

4QFY14 Results Update | Sector: Metals

Tata Steel


Sanjay Jain (SanjayJain@MotilalOswal.com); +91 22 3982 5412




BSE SENSEX S&P CNX

CMP: INR452 TP: INR496 Buy
23,815 7,109
Bloomberg TATA IN
Equity Shares (m) 971.2
M.Cap. (INR b) / (USD b) 439.1/7.4
52-Week Range (INR) 454/195
1, 6, 12 Rel. Per (%) 2/4/28

Financials & Valuation (INR Billion)
Y/E Mar 2014 2015E 2016E
Net Sales 1,486.1 1,475.9 1,527.7
EBITDA 164.1 191.8 215.5
Adj PAT 34.9 54.2 72.6
EPS (INR) 35.5 53.9 72.9
Gr. (%) 2,162.2 51.9 35.3
RoE (%) 8.2 16.9 19.4
RoCE (%) 9.3 10.9 11.8
P/E (x) 12.7 8.4 6.2
P/BV (x) 1.9 1.5 1.3
EV/EBITDA
( )
7.2 6.3 5.6
TSI led strong opr. performance; capex breaches guidance
Consolidated EBITDA increased 25% QoQ to INR50.1b helped by strong operating
performance of TSI. TSE EBITDA declined 5% QoQ due to shrinkage in spreads.
Average EBITDA per ton improved 5% QoQ to USD107.
The reported Net debt (inclusive of INR22.75b perpetual bonds) has reduced by
INR28b QoQ due to forex gain of INR19b and inventories reduction at TSE.
TSIs EBITDA increased 40% QoQ to INR41b driven by 17% volume growth, 4%
growth in realization, and lower fixed & power fuel costs. Volume guidance for
FY15 has been revised up from 8.8mt to 9.1-9.2mt.
TSEs EBITDA decreased 5% QoQ to INR8.2b due to margin squeeze. Margins were
hit by shrinkage in spread by Euro15 QoQ to Euro 175. EBITDA per ton declined
25% QoQ to USD33. 1QFY15 spreads are up Euro 15/t.
FY14 capex, at INR165b, was INR20b above our estimates. FY16 capex guidance
too is significantly higher at INR165b vs. our est. of INR120b apparently factoring
some of capex in less discussed projects.
We have upgraded TSI EBITDA per ton by USD4 and volumes by 230kt for both
FY15 and FY16. Increase in net debt, due to higher than estimated capex, is having
negative impact on equity value. Overall SOTP is cut by INR36 to INR496/share
based on FY15 estimate.
We believe that the accelerating global (ex-China) demand (key market for Tata
Steel) is likely to drive volumes and margins for Tata Steel. KPO is rightly
positioned to leverage upturn in Indian steel demand. Maintain Buy.


Investors are advised to refer through disclosures made at the end of the Research Report.


15 May 2014 2

Tata Steel
Consolidated: TSI led strong opr. performance; capex breaches guidance
Consolidated EBITDA increased 25% QoQ to INR50.1b helped by strong
operating performance of TSI (Indian operations). TSE (Europe) EBITDA declined
5% QoQ due to shrinkage in spreads. Average EBITDA per ton improved 5% QoQ
to USD107.
PBT increased sharply by 78% QoQ (+35% YoY) to INR24.8b due to high financial
leverage. Adjusted PAT increased 115% QoQ (+22% YoY) to INR10.8b.
The reported Net debt (inclusive of INR22.75b perpetual bonds) has reduced by
INR28b QoQ due to forex gain of INR19b and inventories reduction at TSE by
0.5mt to 2.2mt.
FY14 capex, at INR165b, was INR20b above our estimates. FY16 capex guidance
too is significantly higher at INR165b vs. our est. of INR120b apparently factoring
some of capex in less discussed projects. Actual capex for FY14 and guidance for
FY15 have now breached the old guidance of USD2-2.5b annual capex on
consolidated basis.



Standalone (TSI): strong operating performance helped by price & cost
Net sales increased 20% QoQ to INR122b driven by 17% growth in volume and
4% increase in realization. Realization growth was partly helped by sales of
scrap. Steel realization increased INR1231/t QoQ.
The segmental (Long/flat) break up of volumes and realization is no longer
available because marketing and sales team has been realigned to customer
segment. The realignment of sales and marketing team has helped TSI post
strong 14% YoY growth in sales to 8.5mt in an environment where domestic
demand was stagnant.
EBITDA increased 40% QoQ to INR41b driven by 17% volume growth, 4% growth
in realization, and lower fixed & power fuel costs.
EBITDA per ton for steel segment was up 23% QoQ to INR16,045 (or by USD50
to USD260). Adjusted PAT increased 40% QoQ to INR21.2b.
Strong growth in volumes,
higher realization and lower
fixed cost growth operating
performance

15 May 2014 3

Tata Steel
Volume guidance for FY15 has been revised up from 8.8mt to 9.1-9.2mt. Market
conditions are stable currently and are expected to improve in 2HFY15.
Auto sector is expected to register slow growth; Construction and capital goods
sectors should revive with better macro-economic conditions. TSI will keep the
focus n domestic market.
Tata steel has already spent INR165b (INR80b in FY14) on Kalinganagar Project
in Odisha (KPO) and plans to spend INR90b in FY15. The project is expected to
be completed by end of FY15.
Together with KPO, the TSI capex will range INR100-105b in FY15.

Tata steel Europe: margins hit by shrinking spreads
Liquid steel production improved further 3% QoQ to 4.04mt. Sales volumes
increased robust 28% QoQ (+19% YoY) to 4.07mt due to improvement in
domestic demand. Inventories declined by 500kt to 2.2mt.
EBITDA decreased 5% QoQ to INR8.2b due to margin squeeze. Margins were hit
by shrinkage in spread (Bet steel prices and lagged raw material cost) by
Euro15 QoQ to Euro175/t and absence of GBP27m NRV write back. Increased
production helped EBITDA by GBP26m. EBITDA per ton declined 25% QoQ to
USD33.

HRC Spreads are expected to expand in 1QFY15 to Euro190

Source: Company

EU demand is expected to show further recovery in 1QFY15 (+3.9%) as activity in
the steel using sectors is increasing, albeit from a low base
Embedding customer focus, improving reliability and efficiency are key areas of
focus for TSE.
Liquid steel production is expected to remain flat at 15.5mt in FY15.

Volume guidance for FY15
in enhanced from 8.8mt to
9.1mt.
28% QoQ increase in sales
tonnage helped by
inventory liquidation
Margins hit by
shrinking lagged
spreads
HRC Spread = Price of 1t of
HRC (Germany) - 1.6t of
iron ore (Fines, 64% Fe,
Brazil contract, SSF,
Rotterdam delivered) - 0.7t
HCC (Australia quarterly
contract, Rotterdam
delivered) - 0.1t Scrap (E3,
Germany)

15 May 2014 4

Tata Steel

Source: MOSL, Company

Other subsidiaries: margins were hit under Chinese export pressure
EBITDA declined 60% QoQ to INR853m due to margin shrinkage under pressure
from Chinese exports.
Volumes improved 2% QoQ to 1.143mt largely on account of China and
Singapore operations. EAF and rolling mills resumed operations after upgrade in
Singapore.
Construction outlook remains positive in SEA region, but imports from China is
putting pressure.



TSI outlook is robust; but capex breaches guidance and estimates; Buy
TSI has performed significantly better on strong focus on (1) market penetration
by realigning sales & marketing team to customer segment which helped TSI sell
1mt more volumes in stagnant domestic demand during FY14, (2) value addition
(INR3.54b in FY14), and (3) cost reduction (INR12.6b in FY14).
Although strong margins of 4QFY14 are not sustainable, yet we believe that
margins will remain marginally better YoY in FY15 due to further reduction in
costs on account of weaker coking coal prices, full benefit of 11
th
Coke oven
battery which was commissioned at the end of FY14, stable to improving
domestic demand.
Oversupply of iron ore in global seaborne market is putting pressure on
international iron ore and thereby on steel prices. This is a potential risk to
margins of TSI. However, there are many positives that will likely offset.
TSI has revised FY15 guidance upward by 300-400kt to 9.1-9.2mt for FY15 on
stable market condition and expectation of demand improvement in 2HFY15.
TSE guided that volumes will be unchanged in FY15. The lagged spreads have
expanded by Euro 15/t QoQ to Euro 190/t for 1QFY15 due to sharper fall in raw
material prices as compared to steel prices. TSE is targeting to break even at
EBIT level in FY15. We believe that TSE has huge potential to improve its cost
TSI did well in tough market
condition
Global iron ore
oversupply is a source
of risk, but there are
many positives to
margins

15 May 2014 5

Tata Steel
structure knowing high fixed costs for long product division and distribution and
building segment. Easing supply of iron ore and coking coal in global seaborne
market, and improvement in Western world steel demand should help spreads
to expand marginally. A combined effect of management action and market
condition should result in turnaround of TSE.
Net debt (inclusive of INR22.75b perpetual bonds) has reduced by INR28b QoQ
to INR688b due to reduction in inventories (0.5mt at TSE) and forex gain of
INR19b.

Quarterly movement in Net debt

Source: company, MOSL

Tata Steel has significantly breached upper end of capex guidance of USD2-2.5b
by USD300m in FY14 and has raised the guidance by USD300m to USD2.8b
(INR165b) for FY15 without announcement of any material new projects. Since
we were expecting capex to taper from INR145b in FY14 to INR120b in FY15, we
are now witnessing net debt estimates (inclusive of acceptance and capex
advances from supplier netted against short term advances) to increase by
INR61b to INR774b in FY15. This has direct impact on equity value.
We have upgrade TSI EBITDA per ton by USD4 and volumes by 230kt for both
FY15 and FY16. This has a positive impact of INR40/share, but increase in net
debt (due to higher than estimated capex) is having negative impact of
INR63/share on equity value. Overall SOTP is cut by INR36 to INR496/share
based on FY15 estimate. However, there is significant upside if we were to roll
over the target price on FY16 estimate.
We believe that the accelerating global (ex-China) demand (key market for Tata
Steel) is likely to drive volumes and margins for Tata Steel. KPO is rightly
positioned to leverage upturn in Indian steel demand. Maintain BUY.





540
554
588
567
625
651
716
688
500
580
660
740
820
1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 2QFY14 3QFY14 4QFY14
I
N
R

b
i
l
l
i
o
n
Net Debt (incl. of perpetual bonds) Cash & eq. forward covers
Net debt was down INR28b
QoQ on forex gain &
inventory reduction

15 May 2014 6

Tata Steel

Tata Steel: SOTP Valuation

2012 2013 2014E 2015E 2016E
India
EBITDA per ton (USD) 347 263 234 245 244
Sales (m tons) 6.6 7.5 8.5 9.1 9.7
EBITDA-India 113,937 113,232 128,169 141,047 148,762
Target EBITDA multiple 6.5 5.5 5.5 6.5 6.0
EV (India) - (a) 740,592 622,778 704,930 916,805 892,574
INR/share 762 641 726 944 919
TSE and other subs.
EBITDA per ton (USD) 10 11 33 46 59
Depreciation per ton (USD) 40 43 36 36 35
EBIT per ton (USD) -29 -32 -3 10 24
Sales (m tons) 17.6 16.7 18.0 18.4 18.8
EBIT -24,852 -29,370 -3,184 10,934 26,879
Target EV/EBIT multiple 7.0 7.0 7.0 7.0 7.0
EV (TSE) - (b) -173,963 -205,588 -22,289 76,539 188,151
INR/share -179 -212 -23 79 194
Target EV (c=a+b) 566,629 417,190 682,641 993,343 1,080,725
Net Debt (d) 525,413 601,496 739,608 773,856 766,219
INR/share 541 619 761 797 789
D/E x (adj for goodwill) 2.1 2.8 3.2 2.7 2.2
CWIP (e) 282,862 334,861
INR/share 291 345
(d1) Discount (%) 33 33
Investments (f) 90,889 90,889
INR/share 94 94
(d2) Discount (%) 20 20
TP (c-d+e*(1-d1)+f*(1-d2)) 481,716 611,574
Target Price (INR /share) 496 630



15 May 2014 7

Tata Steel



Tata Steel: an investment profile
Company description
Tata Steel is the lowest cost steel producer in India.
Globally, it is the 12th largest steel company, with
24.1m tons of steel sales in FY13. It has operations
spread over Europe, the UK, Asia, North America and
rest of the world, with an annual capacity of 27m tons.
On a consolidated level, it has ~22% raw material
security. Annual production is likely to increase to 29-
30m tons with the help of Greenfield projects in Orissa.

Key investment arguments
TSI (India) is likely to benefit from productivity
gains, volume growth and acceleration of domestic
demand growth.
3mtpa expansion at Kalinganagar is expected to be
completed in 1HFY16. New Greenfield site has laid
the foundation for next leg of growth for its high
margin business in India.
TSE will continue its focus on cost reduction and
product mix improvement. Slowing Chinese GDP
has eased the pressure on raw material supply and
prices. European steel demand is expected to
accelerate from near stagnation in 2013 to 3%
growth in CY14 & CY15. The conversion spreads for
flat products are expanding.
Net debt has peaked because cash flows with
outstrip capex.
Key investment risks
TATA's earnings have high leverage to steel prices
and earnings from European operations.
Indian iron ore mines are significant driver of
margins. Shah commission report has pointed certain
gaps in statutory permission albeit largely due to
ambiguity in law & inefficiencies of govt. machinery.

Recent developments
11
th
coke oven battery was commissioned. With this,
the 10mtpa Jamshedpur steel site is now fully self
sufficient in coke capacity.

Valuation and view
We expect gradually operating cash flows to outstrip
capex thereby leading to peaking of net debt. The
stock trades at EV 5.3x FY15E EBITDA. Maintain BUY.

Sector view - positive
We believe that Indian steel demand growth has hit
bottom in FY14. We expect Indian steel demand
growth to accelerate to 4% in FY15 and 6% in FY16.
The conversion spreads for steel mills are expanding
on global demand (ex-China) growth and oversupply
of iron ore and coking coal.
Comparative valuations
TATA
Steel
SAIL JSW
steel
P/E (x) FY15E 7.9 10.3 12.3
FY16E 6.3 8.2 13.8
P/BV (x) FY15E 1.4 0.7 1.5
FY16E 1.2 0.6 1.4
EV/Sales (x) FY15E 0.7 1.2 1.2
FY16E 0.7 1.1 1.2
EV/EBITDA (x) FY15E 5.9 8.3 6.6
FY16E 5.4 6.9 6.5
EPS: MOSL forecast v/s consensus (INR)
MOSL
Forecast
Consensus
Forecast
Variation
(%)
FY14 53.9 48.1 12.1
FY15 72.9 54.1 34.7

Target price and recommendation
Current
Price (INR)
Target
Price (INR)
Upside
(%)
Reco
452 496 10 Buy

Shareholding pattern (%)

Mar-14 Dec-13 Mar-13
Promoter 31.4 31.4 31.4
Domestic Inst 25.4 25.3 27.2
Foreign 18.4 19.1 16.1
Others 24.8 24.2 25.3

Stock performance (1-year)





15 May 2014 8

Tata Steel


Financials and valuation

Income statement (INR Billion)
Y/E March 2013 2014 2015E 2016E
Net Sales 1,347.1 1,486.1 1,475.9 1,527.7
Change (%) 1.4 10.3 -0.7 3.5
EBITDA 123.2 164.1 191.8 215.5
EBITDA Margin (%) 9.1 11.0 13.0 14.1
Depreciation 55.8 58.4 58.7 59.5
EBIT 67.5 105.7 133.0 155.9
Interest 39.7 43.4 45.4 46.2
Other Income 4.8 5.2 5.3 5.4
Extraordinary items -73.9 -1.4 0.0 0.0
PBT -41.3 66.1 92.9 115.1
Tax 32.3 30.6 37.4 40.9
Tax Rate (%) -78.1 46.3 40.2 35.5
Reported PAT -73.6 35.5 55.6 74.2
Adjusted PAT 0.3 36.9 55.6 74.2
Change (%) -98.3 13,331.4 50.5 33.6
Min. Int. & Assoc. Share 3.0 -0.6 -1.4 -1.6
Adj Cons PAT 1.5 34.5 52.4 70.8

Balance sheet (INR Billion)
Y/E March 2013 2014 2015E 2016E
Share Capital 9.7 9.7 9.7 9.7
Reserves 332.0 349.5 406.9 468.7
Net Worth 341.7 359.2 416.6 478.4
Debt 707.7 777.0 798.1 819.2
Deferred Tax 31.2 26.9 40.3 54.3
Total Capital Employed 1,097.3 1,179.8 1,271.4 1,368.4
Gross Fixed Assets 1,352.6 1,495.0 1,569.9 1,638.8
Less: Acc Depreciation 798.4 856.8 915.5 975.1
Net Fixed Assets 554.3 638.2 654.4 663.7
Capital WIP 137.9 192.9 282.9 334.9
Investments 25.0 25.0 25.0 25.0
Current Assets 580.3 537.9 521.9 564.8
Inventory 240.9 244.3 242.6 251.1
Debtors 139.9 162.9 161.7 167.4
Cash & Bank 106.2 37.4 24.2 53.0
Loans & Adv, Others 93.3 93.3 93.3 93.3
Curr Liabs & Provns 330.8 344.7 343.3 350.7
Curr. Liabilities 197.8 211.7 210.3 217.6
Provisions 133.0 133.0 133.0 133.0
Net Current Assets 249.5 193.1 178.6 214.2
Total Assets 1,097.3 1,179.8 1,271.4 1,368.4
E: MOSL Estimates

Ratios
Y/E March 2013 2014 2015E 2016E
Basic (INR)
EPS 1.6 35.5 53.9 72.9
Cash EPS -17.1 94.2 114.4 134.2
Book Value 217.3 235.3 294.4 358.0
DPS 8.0 8.0 8.0 9.0
Payout (incl. Div. Tax.) 4,916.2 36.6 25.8 19.7
Valuation(x)
P/E 288.2 12.7 8.4 6.2
Cash P/E -26.4 4.8 4.0 3.4
Price / Book Value 2.1 1.9 1.5 1.3
EV/Sales 0.8 0.8 0.8 0.8
EV/EBITDA 8.4 7.2 6.3 5.6
Dividend Yield (%) 1.8 1.8 1.8 2.0
Profitability Ratios (%)
RoE 4.2 8.2 16.9 19.4
RoCE 6.1 9.3 10.9 11.8
Turnover Ratios (%)
Asset Turnover (x) 1.2 1.3 1.2 1.1
Debtors (No. of Days) 37.9 40.0 40.0 40.0
Inventory (No. of Days) 65.3 60.0 60.0 60.0
Creditors (No. of Days) 59.0 58.5 59.8 60.5
Leverage Ratios (%)
Net Debt/Equity (x) 2.8 3.2 2.7 2.2

Cash flow statement (INR Billion)
Y/E March 2013 2014 2015E 2016E
OP/(Loss) before Tax -41.3 66.1 92.9 115.1
Depreciation 55.8 58.4 58.7 59.5
Others -4.8 -5.2 -5.3 -5.4
Interest 39.7 43.4 45.4 46.2
Direct Taxes Paid -25.7 -34.8 -24.1 -26.8
(Inc)/Dec in Wkg Cap 31.3 -12.4 1.4 -6.8
CF from Op. Activity 133.2 116.9 169.1 181.9
(Inc)/Dec in FA & CWIP -154.7 -165.0 -164.0 -120.0
(Pur)/Sale of Invt 29.5 0.0 13.0 0.0
Others -3.3 3.8 5.3 5.4
CF from Inv. Activity -128.6 -161.2 -145.8 -114.6
Inc/(Dec) in Net Worth 2.6 0.0 0.0 0.0
Inc / (Dec) in Debt 25.2 30.0 20.0 20.0
Interest Paid -34.7 -45.2 -47.2 -48.0
Divd Paid (incl Tax) -13.6 -9.3 -9.3 -10.5
CF from Fin. Activity -20.4 -24.5 -36.5 -38.5
Inc/(Dec) in Cash -15.8 -68.8 -13.2 28.8
Add: Opening Balance 122.0 106.2 37.4 24.2
Closing Balance 106.2 37.4 24.2 53.0





15 May 2014 9

Tata Steel
N O T E S

15 May 2014 10

Tata Steel

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