♦ Apart from Arcelor Mittal, Tata Steel is the only globally leading player, with strong presence
Prasad Baji
in both Asia and Europe. This unique position gives it the benefits of: +91-22-2286 4248
(i) scale and premium positioning (due to its European operations); and (ii) strong margins prasad.baji@edelcap.com
Truly, big can also be beautiful. We are positive about the following multi-pronged strategy that Tata
Steel is adopting and believe it is the foundation to sustainable success:
♦ Aggressively scale capacity in Asia, the growth engine for global steel. Current steel making
capacity of ~8mtpa in Asia is expected to reach ~37mtpa by CY15E.
♦ Maintain Corus’s market leading presence in premium products.
♦ Improve raw material security. The recent strategic investments in Mozambique (coal) and Ivory
Coast (iron ore) are initiatives in this direction. Reuters : TISC.BO
Bloomberg : TATA IN
Outlook and valuations: Strong, visible earnings growth; maintain ‘BUY’
Corus’s EBITDA margins have improved from 6.9% in CY06 to an estimated 10.5% currently Market Data
led by strong European steel prices which have surprised on the upside. Overall, going 52-week range (INR) : 1,049 / 399
forward, we are confident of the current EBITDA margins being maintained at Corus led by Share in issue (mn) : 730.7
expected price increases, increase in capacity utilization (up from 88% in FY07 to 96% in M cap (INR bn/USD mn) :683.2/17,257.0
FY09E) and cost savings/synergy benefits (of USD 40 mn in FY09E). As a result, Avg. Daily Vol. BSE/NSE (‘000) : 4,165.5
consolidated PAT and EPS are expected to increase by 32% and 22%, respectively, in
FY09E. We have valued each of the three key geographical segments of the company viz.,
Europe, India, and South East Asia by comparing with respective peers and arriving at Share Holding Pattern (%)
applicable FY09E EV/EBITDA multiple for each geographical segment. We have been Promoters : 33.8
conservative in calculating the valuation multiples and hence, believe the risk to our fair MFs, FIs & Banks : 19.0
value per share is on the upside. Our fair value per share for Tata Steel works out to FIIs : 21.4
INR 1,219. We maintain ‘BUY’. Others : 25.8
Financials (consolidated)
Year to March FY07* FY08E FY09E FY10E
Revenues (INR mn) 252,133 1,191,923 1,309,622 1,320,137
Rev. growth (%) 2,406.8 37,273.6 987.5 80.3 1,200 7,000
EBITDA (INR mn) 74,502 185,844 226,018 225,368
Net profit (INR mn) 41,773 95,712 126,394 116,698 900 5,250
('000)
600 3,500
EPS (INR) 72.0 116.4 141.6 130.7
EPS growth (%) 6.6 61.6 21.6 (7.7) 300 1,750
P/E (x) 13.0 8.0 6.6 7.2
EV/EBITDA (x) 9.2 7.3 6.1 6.1 - -
ROE (%) 33.5 45.0 39.8 30.5 Dec-06 Jun-07 Dec-07
* without Corus
Edelweiss Research is also available on Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.
1
Tata Steel
Investment Rationale
Tata Steel is the only globally leading player, besides Arcelor Mittal, with strong presence in both
Asia and Europe. This unique position provides the company the benefits of: (i) scale and
premium positioning (due to its European operations); and (ii) strong margins and volume-based
growth (due to its Asian operations). European operations accounted for more than three-fourth
of revenues, while Asian operations accounted for nearly 60% of EBITDA in FY07 (see Charts 1
and 2).
In the near term, we expect the high prices and volume from European operations to drive
revenues while low cost Asian operations are expected to maintain profitability. In the long term,
we expect Tata Steel’s Asian operations to show strong volume growth with margins being
maintained, while in Europe we expect significant margin improvement due to captive raw
material with small increase in volume. The recent strategic investments in Ivory Coast for iron
ore (75% stake; reserves said to be between 700 mn tonnes and 1,000 mn tonnes) and
Riversdale Mining for coking and thermal coal (35% stake; inferred resources of ~105 mn
tonnes) are initiatives to strengthen raw material security at Corus. Tata Steel has guided for a
raw material security of 60-80% in the next five years. We believe that with the above two mines
expected to commence in about three years and considering their potential to meet all of
Corus’s requirements, this target could possibly be surpassed and the company is likely to have
90% plus raw material security.
S.E. Asia
7%
India
16%
Europe
77%
2
Tata Steel
S.E. Asia
4%
India
53%
Europe
43%
In our view, a global steel company must not only have geographically diversified sales but also
manufacturing facilities located in different regions, enabling it to enjoy benefits realized locally.
10
Arcelor Mittal
Geographical diversity
Corus acqusition has enabled Tata Steel
to become a diverse, global player Tata Corus
6
4
Tata Steel US Steel Riva
(before) Posco 2
Nucor
Nippon
Tangshan Baosteel JFE
0
0 9 18 27 36 45
Portfolio diversity
As set out in Charts 3 and 4, on this scale, we consider Tata Steel more global than its Asian
counterparts such as Baosteel, POSCO, JFE, and Nippon (with presence only in Asia) or
European counterparts such as Thyssen Krupp and Riva (with presence only in Europe).
3
Tata Steel
From a primarily India-centric sales structure prior to the Corus acquisition, Tata Steel earns
close to 37% of its revenue from Europe and 8% from the reviving North American markets
(Charts 5 and 6).
Other-Asia
23%
India
69% ROW
8%
4
Tata Steel
North America
8% UK
22%
Europe
37%
Asia
24%
ROW
9%
Earlier, the acquisition of Singapore-based NatSteel and Thailand’s Millennium Steel gave Tata
Steel access to six key Asian steel markets—China, Thailand, Vietnam, Malaysia, Australia, and
Philippines. Thus, among the global top ten players, Tata Steel has a huge footprint in South
East Asia surpassing even that of Arcelor Mittal and the company is well placed to tap emerging
opportunities in the Asian market.
Europe and NAFTA likely to account for ~45% of global premium flats in CY10E….
Global premium flats consumption (see Chart 7) is expected to grow at a CAGR of 6.4%
through CY15E while consumption of total flats (including commodity flats) is likely to grow at a
CAGR of 3.4% over the same period. Europe and NAFTA, Corus’s primary markets, are
expected to account for ~45% of total premium products consumption in CY10E, followed by
Asia at 22% (Chart 8).
800
Global demand for premium products
expected to grow at 6.4% CAGR
700
600
mtpa
500
400
300
2005 2010E 2015E
5
Tata Steel
ROW
8%
Asia
22%
Europe
24%
220mtpa
CIS
South America
4%
3%
Source: CRU
We view this as positive for the company, since it opens fresh opportunities to increase its
value-added portfolio, realizations, and improve profitability.
In the US, steel prices have started moving up in recent months. Although demand
fundamentals in the US are still far from encouraging, factors such as low import pressure due
to Chinese government’s export policy, weak US dollar with respect to Euro (which has caused
European prices to remain at premium to US prices since the beginning of this year) and
continued destocking since December 2006 which has pushed stocks at service centers to
extremely low levels, have pushed prices up. Since September 2007, steel makers in the US
have been trying (and succeeded) to effect price hikes. In flats, after a first round of hikes in
Q4CY07 of USD 30-40/s. tonne, steel makers are pushing for another hike of the same
quantum. In longs, after two successful price hikes of USD 30/s.tonne each for October and
November deliveries, Arcelor Mittal is trying for a further hike of USD 40/s.tonne for January
deliveries.
International Iron and Steel Institute (IISI) has forecast a 4% steel demand growth in the US for
CY08. Hence, we believe, US steel makers (like their European counterparts) will not settle for
any margin squeeze due to high raw material prices and expect prices to remain firm for the
next year.
6
Tata Steel
Table 1: Steel consumption expected to grow at average 9% in Asia until CY08E (mt)
Regions CY06 CY07E CY08E % 05/06 % 06/07E % 07/08E
EU-27 184.9 192.2 195.0 11.4 4.0 1.4
Other Europe 27.2 29.3 31.0 11.0 7.8 5.7
C.I.S. 50.0 59.8 65.2 18.1 19.5 8.9
N.A.F.T.A. 155.7 148.1 153.9 11.5 (4.9) 4.0
Central & South America 35.6 39.5 41.6 11.8 10.9 5.2
Africa 23.1 25.1 27.5 11.4 8.9 9.5
Middle East 37.3 40.4 43.4 9.8 8.4 7.5
Asia (inc. Oceania) 607.2 663.2 721.1 6.2 9.2 8.7
Total 1,121.0 1,197.6 1,278.7 8.8 6.8 6.8
Source: IISI
We estimate the average incremental increase in EBITDA to be roughly around 4% for per unit
increase in revenue for Corus (assuming no change in cost structure). Besides having a unique
global presence, Tata Steel is also among the top 10 steel makers in both flats and longs.
Besides Tata Steel, only Arcelor Mittal, Nippon, JFE Steel, and the Riva Group have a significant
presence in both the products (see Tables 2 and 3). We believe this balanced presence in both
segments places Tata Steel in a better position to benefit from overall steel up cycle as we are
witnessing now.
Except Arcelor Mittal, all the other steel players are geographically concentrated. This leaves
Arcelor Mittal and Tata Steel as the only two players who are spread geographically as well as
have a comprehensive product mix.
7
Tata Steel
The greenfield projects will include captive iron ore mines in their scope. The comprehensive
nature of the proposed product range (encompassing both flats and longs) indicates that Tata
Steel is looking to maintain a balanced portfolio.
35
India Europe S.E. Asia 4.9
3.6 28
(mn tonnes)
21
22.6
21.1
14
4.9 6.7
0
FY07 FY10E
We expect synergies with Corus in all aspects of steel making—research and development,
technology sharing, portfolio enrichment, product and process flow, besides operational and
financial benefits due to scale (see Table 5).
8
Tata Steel
Tata Steel has a history of having very high capacity utilization with its Jamshedpur plant
operating above 95% capacity utilization. We are confident of the company replicating this
model at Corus through sharing of shop floor practices.
Corus’s high end products align with Tata Steel’s strategic focus.…
Corus’s product profile remains top drawer with construction, automotive, and even steel used
in the aerospace industry and we expect Tata Steel to benefit from the same (Table 7). Corus’s
flats range encompasses mainly value-added products and currently controls 14% of the
European auto market.
This is in alignment with Tata Steel’s strategic focus. The latter has in recent times increased its
total market share in auto sales from 36% (~360kt) in 2003 to 44% (~870kt) in 2007 (Chart 10).
70 50
56 40
% share (individual)
% share (total)
42 30
28 20
14 10
0 0
FY03 FY04 FY05 FY06 FY07
HRC CRC HDG Total (RHS)
Source: Company data
9
Tata Steel
Tata Steel has no experience in heavy sections in specialty longs. The deal not only widens
sales opportunities for structurals in Asia, but Corus’s beams-producing expertise can also be
channeled for Tata Steel going forward (Table 8).
As in flats, this is also in alignment with Tata Steel’s focus on the domestic construction sector.
It has 26% market share in the construction sector products and we expect further gains for the
company from the new technologies Corus has to offer.
Besides synergies arising from product portfolio enrichment, we are also optimistic on synergies
to be realized in R&D. Corus has a strong R&D unit which employs around 950 researchers
(Tata Steel employs 88). Apart from providing routine consultancy services, the team has been
involved in two innovative products—HybrelTM and Ymagine. The former is a pioneer product in
plating strip steel, a coating that combines properties of both metals and particles and the latter,
a light gauge, pickled and oiled steel used in the automotive and construction sectors.
We expect these proprietary technologies to complement Tata Steel’s brands which generated
INR 46 bn revenue in FY07.
The company has recently entered into a transaction with Riversdale Mining for 35% stake in
Benge and Tete coal mine licenses in Mozambique (inferred resources of ~105 mn tonnes) for
USD 88.2 mn. This entitles the company to a 40% off take of coking coal and 35% of non-
coking coal at commercial terms. We expect the development on this site to be easier since
infrastructure in the region has already been developed by Vale (earlier CVRD) which owns the
adjacent block. The company expects to share the cost of the infrastructure with Vale and start
production in three years at the latest.
Besides this, Tata Steel has also acquired 75% equity stake in Mount Nimba iron ore mine in
Ivory Coast having 700-1,000 mn tonnes of iron ore reserves (preliminary estimates) with grade
above 60% by Fe content. Balance stake will be held by a state-owned enterprise. The
prospecting is still on and management expects to get the mine operational within three years.
This project could potentially involve an investment of USD 1.5 bn in the next three years to
10
Tata Steel
develop the mine as well as supporting infrastructure. The project is expected to involve
construction of a dedicated railway line and up gradation of the existing port infrastructure.
We believe that Tata Steel is likely to undertake further such strategic investments in the near
future and could end up with raw material self sufficiency of over 90%.
Tata Steel has several other projects in the pipeline focusing on operational improvements at
Corus and adding more capacity mainly in Asia.
Two major projects are being carried out at total investment of GBP 317 mn for installing a new
continuous galvanizing line with a new three-stand CR mill at IJmuiden and sections mill at
Scunthorpe for specialty longs for the construction sector (Table 10).
Besides these, two other projects are in progress at Port Talbot and Teesside concentrating on
improving the operational efficiency of blast furnace and slab caster, respectively. We expect the
new capacity to come on line by CY08 and ramp up to happen in CY09/FY10E.
The Middle East region throws up interesting possibilities in the coming few years. This region is
similar to the Mediterranean region and has been historically a trading region with almost no
domestic capacity. However, construction is being undertaken on at a great pace in this region
currently, thus bolstering the demand for specialty sections. We view the 3 mtpa Iranian project
(see Table 11) a positive step in this direction since it is based on DRI which is being used for
manufacturing high quality sections worldwide. The project is also expected to be cost effective
since energy forms a major chunk of the EAF cost which is available at low price in the gulf.
However, this project is also exposed to serious political risk due to its location in Iran. Except
for the Millennium Steel expansion we have not considered any of these projects in our earnings
model.
11
Tata Steel
Valuations
We have used the sum-of-the-parts (SOTP) approach by valuing the three geographical operations
of Tata Steel (viz., Europe, India, and South East Asia) on FY09E EV/EBITDA multiple basis, thus
taking into account the different sets of characteristics, risks, and growth opportunities associated
with each of them. To arrive at suitable EV/EBITDA multiples for these geographical segments we
have adopted the following approach:
♦ Rank all the companies, including the corresponding segment of Tata Steel. For this we believe
following to be valuation drivers:
• Return on equity.
For comparison, we have considered select European and Russian players such as Arcelor Mittal,
Severstal, and Voestalpine MMK. We have ranked all the companies on the above valuation
parameters viz., revenue, EBITDA margin, EBITDA growth, and RoE. Our analysis ranks Corus fifth
among the peer group of 10 companies. In spite of this mid-point rank, we are conservatively
ascribing an EV/EBITDA of 5.0x for FY09E for Corus, which is at a ~10% discount to the average
multiple of 5.5 FY09E (Table 12). Considering Corus’s scale and premium product range, one could
potentially argue for removing the discount but we have chosen to be conservative. Later in this
section we have provided a sensitivity of the fair value per share of Tata Steel across various FY09E
EV/EBITDA multiples for Corus.
12
Tata Steel
For Tata Steel India, we have considered regional peers such as JFE, Nippon, and POSCO from Far-
East and Chinese players such as Angang and Baoshan. We have ranked all the companies on the
above four parameters. Tata Steel India stands second in our ranking between two Chinese
players—Angang Steel and Wuhan Steel—which are trading at FY09E of 11.5x and 12.0x,
respectively (Table 13).
Tata Steel India’s No. 2 rank is due to its high EBITDA margin (~44%) and strong profit growth going
forward, even though it loses out on the scale parameter. In spite of this, we would like to be
conservative and choose to value Tata Steel India at EV/EBITDA multiple of 8.5, close to the average
EV/EBITDA of 8.2x for the peer group. It may be mentioned that players ranked 1 and 4 have a
much higher EV/EBITDA of 11.5x and 12.0x, respectively.
We value South East Asian operations on EV/EBITDA of 4.2x (a 50% discount to the multiple for Tata
Steel India). These operations are low on scale, have no raw material security, and manufacture
longs (having less realization than flats).
13
Tata Steel
We estimate the total EV at USD 38.8 bn and after deducting net debt of USD 14.6 bn we arrive
at equity valuation of USD 24.2 bn. We estimate the present fully diluted number of shares at
852 mn after taking into account all the current issuances including rights equity, CCPS
(cumulative convertible preference shares), and CARS (foreign currency convertible alternative
reference securities). The CARS being non-voting we have attributed a 75% equivalence factor
to them while adding to the voting shares. The base price per share works out to INR 1,108 per
share. We estimate fair value at 10% higher after considering the following:
• Different scenarios for increase/decrease in selling prices and raw material prices over
base case.
Sensitivity on multiples
We have done sensitivity analysis on EV/EBITDA multiple ranges covering most of the
companies in the European sector (for Corus) and Asian sector (for Tata Steel India). As set out
in Table 15, for Corus, the range is between Severstal (4.8x in CY08) and Arcelor Mittal (6.5x in
CY08) and for Tata Steel India, we have a range between POSCO (6.5x in CY08) and Wuhan
Steel (12.0x in CY08).
14
Tata Steel
Even if one discounts Corus further and considers an EV/EBITDA multiple of 4.5, the fair value
of share is still above INR 1,000/share. Post even partial raw material security for Corus in the
future, we believe Corus’s operations should be valued at forward EV/EBITDA of 5.5x; still at a
discount to Arcelor Mittal but implying a further upside to our fair price.
Table 15: Sensitivity analysis at various multiples for Corus and Tata Steel India
EV/EBITDA multiple range for Corus
INR/share Severstal Arcelor Mittal
With the 1.8 mtpa expansion in Jamshedpur on track, we expect an improvement in Tata Steel
India’s operational scale through to FY10E. Coupled with high, sustained level of raw material
security in India and considering its No. 2 rank among its peers, one can justify a higher multiple
for Tata Steel India compared to our assumption which would imply an upside to our fair price.
Overall, we believe our multiples are on the conservative side and hence, there may be upside
from a possible re-rating (albeit a moderate one if it does happen) going forward.
We have set out the sensitivity of steel and raw material prices (iron ore and coking coal) to our
assumptions for Corus in FY09 (Table 16). The valuation is more sensitive to the changes in
steel prices than prices of raw materials due to higher proportion of premium products which
are affected the most either way.
For Corus, raw material cost is about 60% of the revenue hence the effect of raw material cost
changes is a bit less. With prices looking strong due to steady demand in Europe and iron ore
and coking coal price hikes factored in our model, we are confident of our base case valuation.
15
Tata Steel
Key Risks
♦ Raw material security: Post Corus acquisition, the raw material self sufficiency of Tata Steel
has dropped to 20% (earlier 100%) for iron ore and 15% (earlier 70%) for coking coal. This
reduced raw material security exposes the consolidated entity to margin decline in the event it is
unable to effect adequate price hikes.
♦ Steel demand in Europe may slow down: We expect Corus to benefit from higher price
realization owing to stable demand in Europe in the medium term. However, if the same slows
down and prices start moderating earlier than anticipated, there is a significant risk of margins
taking a hit since over 60% of Tata Steel’s volumes are from European operations.
♦ Extent of synergies realized through Corus acquisition: We believe the scope of synergies
with Corus is significant. These are expected to bring in benefits of USD 450 mn by reducing
cost at Corus on one hand and enriching Tata Steel’s product portfolio on the other, besides
providing benefits due to scale and tax savings. It will be crucial to see the quantum and timing
of these benefits, although we are confident of a positive outcome, given the management’s
intentions and abilities.
16
Tata Steel
Company Description
Established 100 years ago in 1907, Tata Steel is Asia’s first and India’s largest private sector steel
company. With the take over of Corus Steel, Tata Steel is now the sixth largest steel company in the
world with presence in India, South East Asia, UK, and continental Europe. The flagship company of
the Tata Group, Tata Steel India’s operations are amongst the lowest cost producers of steel in the
world and for two consecutive years has been ranked as the world’s ‘Best Steel Maker’ by World
Steel Dynamics. Tata Steel has a state-of-the-art ~5 mtpa steel making facility at Jamshedpur in
Jharkhand. Including Corus, the total consolidated capacity is now ~28 mtpa and there are ~82,700
employees across four continents. Tata Steel’s products are targeted at the quality conscious auto
sector and the burgeoning construction industry. With wire manufacturing facilities in India, Sri Lanka,
and Thailand, the company plans to emerge as a major global player in the wire business.
Acquisition of Corus has added a new dimension to Tata Steel and propelled it from a domestic
player into the league of truly global steel companies such as Arcelor Mittal, POSCO, and Nippon
Steel. Corus was formed in October 1999 by the merger of British Steel Plc and Koninklijke
Hoogovens NV and in April 2007 became a subsidiary of Tata Steel. It is Europe’s second largest
steel producer with revenues of USD 17.9 bn and crude steel production of 18.3 mn tones in 2006,
primarily in the UK and the Netherlands. Corus comprises three divisions—Strip Products, Long
Products, and Distribution & Building Systems—and has a global network of sales offices and
service centers.
Manufacturing facilities
Corus has manufacturing operations in several countries with major plants located in the UK, The
Netherlands, Germany, France, Norway, and Belgium. The company produces carbon steel by the
basic oxygen (BOF) steel making method at four integrated steelworks at Port Talbot, Scunthorpe,
and Teesside in the UK and at IJmuiden in The Netherlands. Engineering steels are produced at
Rotherham, UK, using the electric arc furnace (EAF) method. The IJmuiden plant is Corus’s largest
and one of Europe’s most efficient plants (Table 18).
17
Tata Steel
Production Actual % of
Major production facilities CY06 (mn tonnes) capacity output capacity
Port Talbot Steelworks, West Glamorgan, UK 4.7 4.0 94
Scunthorpe Steelworks, South Humberside, UK 4.5 4.1 91
Teesside Steelworks, Redcar, Cleveland, UK 3.9 3.1 79
Rotherham Steelworks, South Yorkshire, UK 1.3 0.9 69
IJmuiden Steelworks, Netherlands* 6.8 6.2 91
Total 21.2 18.3 86
Source: Company data
Note: *IJmuiden Steelworks is in the process of increasing steel-making capacity to 7.5mtpa by 2010
Divisions of Corus
Corus is organized broadly into three main divisions, viz. strip products, long products, and
distribution & building systems (Table 19). The strip products division manufactures hot rolled, cold
rolled and metallic-coated steels for many industries. The division’s packaging unit supplies light
gauge steel for packaging and non-packaging applications. In CY06, the strip products division
contributed 48% to revenues and 45% to the sales volume. It also contributed 73% to the EBITDA
and enjoyed a comparatively high EBITDA margin of ~10%.
The long products division comprises the manufacture of plates, sections, wire rods, precision
components, engineering and semi-finished steel. It caters to the construction and industrial, aviation,
shipping, mining, and railway industries. In CY06, the division contributed 24% to revenues and 29%
to the sales volume. It contributed 14% to the EBITDA and had an average EBITDA margin of ~4%.
The distribution and building systems division covers service centers, stockholding and further
materials processing including building products. It also provides a wide range of consultancy
services from iron ore mining through to the marketing of finished products. In CY06, the division
contributed 28% to revenues and 26% to the sales volume. It contributed 14% to the EBITDA and
had an average EBITDA margin of ~3%.
- light gauge steel for packaging - engineering steel products - supply chain service business,
- hot finished and cold formed - rail products - consultany services from iron ore
steel tubular products mining through to the marketing of
finished products
- colored pre-finished steels - precision strip products
- special strip channels - hot-rolled special shaped
steel
- specialized steel for white goods
Source: Company data
18
Tata Steel
Industry Overview
With global demand estimated to grow at 6.8% Y-o-Y in both CY07 and CY08 and steel
makers not willing to take any margin squeeze, we expect global prices will be negotiated at
higher rates for CY08. Additionally, we have seen signs of recovery in the US market with
producers attempting (and succeeding) to effect price hikes.
Our FY09 iron ore and coking coal cost estimates are up 35% and 15% Y-o-Y
Demand for steel making raw material is buoyant. On the supply side, there is no improvement
on the iron ore front and infrastructure bottlenecks continue to stymie even the existing
capacities in Australia and Brazil.
Chart 11: Iron ore and coking coal expected to remain firm through to CY10
170
Iron ore
Coking coal (Hard)
146
122
(USD/tonne)
Up 25%
in FY09E
Moderation not 98
expected until FY11E
Up 35% in FY09E
and 10% in FY10E
74
50
1Q 2006
2Q 2006
3Q 2006
4Q 2006
1Q 2007
2Q 2007
3Q 2007
4Q 2007
1Q 2008
2Q 2008
3Q 2008
4Q 2008
1Q 2009
2Q 2009
3Q 2009
4Q 2009
1Q 2010
2Q 2010
3Q 2010
4Q 2010
19
Tata Steel
We have increased our cost estimates for Corus for iron ore by 35% to USD 107.7/tonne from
FY09 and further up 10% to USD 118.5/tonne from FY10 (Chart 11).
On the coking coal front, China’s return to a net importer position in coal has tightened the
global market considerably with focus shifting to Indonesia and Australia. A combination of
maintenance expansion work, shortage of rail capacity, and port congestion continues to
constrain Australian coal expansion. Freight rates are also at an all time high with latest shipping
rates from Australia to India reported to be up 50% to USD 60/tonne as compared to July.
We have increased our estimates for hard coking coal costs for Corus upwards by 25% to USD
159/tonne from FY09. We expect coking coal prices to be flat in FY10E .
Table 21: Steel prices have gone up through out this year
USD/tonne CY06 Q1CY07 Q2CY07 Q-o-Q chg (%) Q3CY07 Q-o-Q chg (%) Q4CY07 Q-o-Q chg (%)
HRC 584 608 661 9.0 682 3.0 695 2.0
CRC 707 716 753 5.0 771 2.0 806 5.0
HDG 811 872 910 4.0 909 0.0 828 (9.0)
Average 701 732 775 6.0 787 2.0 776 (1.0)
Source: CRU
Recently, at an IISI annual conference, Germany's large steel companies indicated that
increased input prices (including iron ore, logistics, and energy costs) will translate to an
increase in steel prices by USD 60-100/tonne next year.
20
Tata Steel
Financial Outlook
Global steel prices have generally remained at an all time high for CY07. We expect European
HRC prices to go up by USD 80-110/tonne on an average next year. Asia, with is strong
consumption growth, is also expected to witness price hikes next year. Recently, SAIL has
announced that it expects steel prices to go up by USD 25-50/tonne in early CY08. We expect
this to be the likely scenario since steel makers are not willing to settle for any margin squeeze
due to high raw material prices in the face of firm steel demand.
Corus
Crude steel capacity mn tonnes 21.2 21.5 21.8 21.8
Utilization % 88.5 95.2 95.7 95.7
Sales volume mn tonnes 18.8 20.5 20.9 20.9
Average realization USD/tonne 854 981 1060 1074
Average cost of production USD/tonne 795 878 940 960
EBITDA USD/tonne 59 103 120 114
Based on the expected increase in realizations and the proposed volume expansions, we
expect FY08E consolidated EBITDA to reach INR 186 bn over revenues of INR 1,192 bn (Table
23).
21
Tata Steel
In FY09E, we expect a further growth of 22% in EBITDA with 10% growth in revenue. This is
due to favorable steel prices, increased shipments from more profitable Asian operations, and
synergy benefits between Tata Steel and Corus of USD 40 mn. In FY10E, we expect a marginal
decline in revenue and EBITDA since we expect a slight moderation in steel prices with raw
material prices holding firm.
Tata Steel standalone EBITDA margin likely to average 44% for next three years
We expect the current 1.8 mtpa expansion programme at Tata Steel to enhance its profitability
even more in the next two years. With steel prices expected to remain high, increased focus on
value-added products and sufficient raw material security for its Indian operations, we believe
that further growth in EBITDA margin is in store.
Table 24: Tata Steel India-EBITDA margin expected at 45% on average for the coming two years
For the current fiscal year, we expect standalone EBITDA to be at INR 85 bn over revenue of
INR 195 bn, resulting in a margin of 43%. We expect PAT at INR 50 bn implying a net margin of
25% (Table 24). For H1FY08, the standalone operations reported revenue of INR 89 bn and
PAT of INR 24 bn, i.e., a margin of 26%. For the next two years on the back of volume-based
growth in premium products, we expect EBITDA margin to remain within the 45-46% range.
Corus is very critical for Tata Steel’s performance due to its scale and product range (higher
price realization). We believe Tata Steel’s first priority will be to secure the raw material for Corus.
The recent strategic investments in Mozambique and Ivory Coast for coking coal and iron ore
assets, respectively, are steps in this direction.
Table 25: Corus-EBITDA margin likely to remain between 10% and 11% through to FY10E
We expect EBITDA margin to remain in the 10-11% range for the next two years led by a
combination of increase in blended realizations (average 15% in FY08E and average 8% in
FY09E), higher capacity utilization, and improved productivity. This is also in line with the
estimated EBITDA margin for Corus for Q2FY08 and management’s guidance that margins will
be maintained at Corus. In FY08E and FY09E, we expect EBITDA of INR 94 bn and INR 108 bn
over revenue of INR 899 bn and INR 956 bn, respectively (Table 25).
22
Tata Steel
South-East Asia: Margin expected to remain stable over the next two years
We are bullish on the steel consumption growth in South East Asia in the next few years. While
price hikes are expected to be relatively modest (due to lower margin longs); some amount of
volume growth and excellent distribution network is expected to maintain Tata Steel’s South
East Asian operations’ margins stable between 6% and 7% over the next two years (Table 26).
Table 26: South East Asia-EBITDA margin to remain between 6% and 7% through to FY10E
For the current year, we expect an EBITDA margin of 7.5% over revenue of INR 98 bn. We
believe the underlying robust demand will sustain through to FY10E and hence, we expect
EBITDA margin to remain between and 6% and 7% over revenue of INR 112-113 bn in FY09E
and FY10E.
We understand from management that unabsorbed tax losses of USD 2.2 bn at Corus are
available for set off against future profits. As a result, we are estimating tax rate on consolidated
basis at 21% for FY08E and 22% for FY09E.
23
Tata Steel
24
Tata Steel
25
Tata Steel
Ratios
Year to March FY06* FY07* FY08E FY09E FY10E
ROE (%) 42.4 33.5 45.0 39.8 30.5
ROCE (%) 38.0 27.8 27.6 25.4 22.8
Current ratio 1.4 2.5 1.8 1.9 2.7
Debtors (days) 21.9 4.9 10.5 10.4 10.4
Fixed assets t/o (x) 1.9 1.8 3.3 3.5 3.9
Debt/ Equity 0.3 1.7 2.4 1.7 1.5
Valuations parameters
Year to March FY06* FY07* FY08E FY09E FY10E
EPS (INR) 67.6 72.0 116.4 141.6 130.7
Y-o-Y growth (%) 3.5 6.6 61.6 21.6 (7.7)
CEPS (INR) 82.9 89.3 159.5 183.0 174.1
P/E (x) 13.8 13.0 8.0 6.6 7.2
Price/BV(x) 5.0 3.7 2.8 2.3 2.0
Market cap/Sales (x) 2.5 2.1 0.6 0.6 0.6
EV/Sales (x) 2.7 2.7 1.1 1.0 1.0
EV/EBITDA (x) 8.6 9.2 7.3 6.1 6.1
* without Corus
26
Tata Steel
Edelweiss Securities Limited, 14th Floor, Express Towers, Nariman Point, Mumbai – 400 021, Board: (91-22) 2286 4400, Email: research@edelcap.com
Naresh Kothari Co-Head Institutional Equities naresh.kothari@edelcap.com +91 22 2286 4246
Company Update
580 29-Nov-07 Adhunik Riches from the earth… 167 Buy
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300 07-Nov-07Monnet Ispat IPP financial closure in 395 Buy
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