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October 31, 2017
ICICI Securities Ltd | Retail Equity Research
Result Update
Muted performance; set to improve...
Tata Steel reported muted Q2FY18 numbers. Tata Steel Europe’s
EBITDA/tonne came in lower than our estimates on account of lower
realisations while the EBITDA/tonne of Indian operations came in
lower on account of higher than expected operating costs
The Indian operations reported sales volume of 3.1 million tonnes (MT)
while European operations steel sales came in at 2.6 MT. The
consolidated operating revenues came in at | 32464.1 crore (up 23.1%
YoY, 9.8% QoQ) in line with our estimate of | 32468.6 crore
The EBITDA/tonne of domestic operations came in lower at
| 10959/tonne (our estimate: | 13500/tonne). European operations
reported an EBITDA/tonne of ~US$45/tonne (our estimate:
US$85/tonne). The consolidated reported EBITDA came in at | 4720.7
crore. The consolidated EBITDA margin was at 14.5% while ensuing
consolidated PAT was at | 1017.8 crore
JV with Thyssenkrupp to create No.2 steel player in Europe...
Tata Steel and Thyssenkrupp AG have signed a memorandum of
understanding (MoU) to combine their respective flat steel businesses in
Europe and for the steel mill services of Thyssenkrupp group. The
proposed 50:50 joint venture (JV) would be named Thyssenkrupp Tata
Steel. The JV would be formed through a non-cash transaction
framework, based on fair valuation where both shareholders would
contribute debt and liabilities to achieve equal shareholding in the
venture. The company intends to sign definitive agreement by March
2018 and is looking to close the deal by December 2018 or March 2019.
The new company Thyssenkrupp Tata Steel would have annual
shipments of ~21 million tonne with pro forma turnover & EBITDA of €15
billion (| 115000 crore) and ~€1.5 billion, respectively. Tata Steel’s initial
assessment indicates the JV to benefit from cost synergies in the range of
~€ 400-600 million realised through integration of commercial functions,
R&D and other supporting activities.
Focus on enhancing domestic operations to augur well…
Tata Steel’s Indian operations continued to register healthy sales volume
growth during H1FY18 which increased 23% YoY. The sales volume
growth was notably higher compared to the domestic steel consumption
growth of 4.3% YoY during the same period reflecting increase in Tata
Steel’s market share domestically. Going forward, the anticipated JV
(once it goes through) is expected to deleverage the consolidated balance
sheet of the entity and provide platform to pursue both organic/inorganic
growth in the domestic market which augurs well in the long run. We
upward revise domestic sales volume estimate for FY18E to 12.3 MT
(from 12 MT earlier), and maintain FY19E volume estimate of 12.5 MT.
Long term story intact; maintain BUY…
Tata Steel reported a muted Q2FY18 performance. Going forward, we
expect the realisations to increase in the backdrop of firming of domestic
steel prices. However, on account of subdued performance, we have
marginally downward revised EBITDA/tonne estimates for Indian
operations to | 11500/tonne (from | 12000/tonne earlier) for FY18E and
| 13250/tonne (from | 13500/tonne earlier) for FY19E. European
operations EBITDA/tonne estimate has been downward revised to US$65
/tonne (from US$75/tonne earlier) for FY18E, maintained for FY19E at
US$75/tonne. We have incorporated synergy benefit of the potential JV in
our target price. We have valued the stock on SOTP basis and arrived at a
target price of | 785. We maintain BUY rating.
Rating matrix
Rating : Buy
Target : | 785
Target Period : 12 months
Potential Upside : 12%
What’s Changed?
Target Changed from | 700 to | 785
EPS FY18E Changed from | 61 to | 54.9
EPS FY19E Changed from | 71.8 to | 70.3
Rating Unchanged
Quarterly Performance
Q2FY18 Q2FY17 YoY (%) Q1FY18 QoQ (%)
Revenue 32,464 26,371 23.1 29,557 9.8
EBITDA 4,721 2,970 58.9 4,974 (5.1)
EBITDA (%) 14.5 11.3 328 bps 16.8 -229 bps
Rep. PAT 1,018 (49) LP 921 10.5
Adj. PAT 1,043 (104) LP 1,532 (31.9)
Key Financials
(| Crore) FY16 FY17 FY18E FY19E
Net Sales 117151.6 112299.4 130858.4 134790.1
EBITDA 7585.6 17007.8 19256.6 22202.1
Adj Net Profit -2243.2 4092.1 5324.2 6817.5
EPS (|) -23.1 42.2 54.9 70.3
Valuation summary
FY16 FY17 FY18E FY19E
PE (x) NA 16.7 12.8 10.0
Target PE (x) NA 18.6 14.3 11.2
EV/EBITDA(x) 19.7 8.7 7.6 6.4
P/BV (x) 2.2 1.8 2.0 1.7
Adj RoNW (%) -7.3 10.8 15.5 17.0
Adj RoCE (%) 2.1 9.4 11.5 12.3
Stock data
Particular Amount
Market Capitalization (| Crore) 68,402
Total Debt (FY17) (| Crore) 83,014
Cash & Cash Eq. (FY17) (| Crore) 17,458
EV (| Crore) 133,958
52 week H/L (|) 735 / 366
Equity capital | 970.2 Crore
Face value | 10
Price performance (%)
Return % 1M 3M 6M 12M
JSW Steel 6.2 22.3 32.6 59.1
Tata Steel 10.1 30.1 59.9 77.5
Research Analyst
Dewang Sanghavi
dewang.sanghavi@icicisecurities.com
Akshay Kadam
akshay.kadam@icicisecurities.com
Tata Steel (TATSTE) | 704
ICICI Securities Ltd | Retail Equity Research Page 2
Variance analysis
Q2FY18 Q2FY18E Q2FY17 YoY (%) Q1FY18 QoQ (%)
Revenue 32,464.1 32,468.6 26,371.0 23.1 29,556.8 9.8 Topline came in line with our estimates
Other Income 253.2 135.4 108.4 133.6 155.5 62.8
Employee Expense 4,294.1 4,294.7 4,518.3 -5.0 4,303.9 -0.2
Raw Material Expense 14,289.6 13,312.1 9,406.8 51.9 11,069.9 29.1
Other operating Expenses 9,159.8 9,089.1 9,475.9 -3.3 9,209.1 -0.5
EBITDA 4,720.7 5,772.6 2,970.0 58.9 4,973.9 -5.1 EBITDA came in lower than our estimates
EBITDA Margin (%) 14.5 17.8 11.3 328 bps 16.8 -229 bps EBITDA margin came in lower than our estimates
Depreciation 1,473.3 1,523.8 1,467.7 0.4 1,501.1 -1.9
Interest 1,349.9 1,250.8 1,351.1 -0.1 1,343.7 0.5
Exceptional Item 24.9 - 68.4 -63.7 610.9 -95.9
PBT 2,125.8 3,133.4 191.2 1,011.8 1,673.7 10.5
Tax Outgo 1,138.0 1,034.0 363.2 213.3 740.5 53.7
PAT 987.8 2,099.4 (172.0) -674.3 933.2 5.9
Profit from discontinued operations 29.9 - 122.7 -75.6 (12.1) -347.4
Reported PAT for the Group 1,017.8 2,099.4 (49.3) LP 921.1 10.5 PAT came in lower than our estimates
Adjusted PAT for the Group 1,042.6 2,099.4 (103.7) LP 1,532.0 -31.9
Key Metrics
TSI Steel Sales (MT) 3.1 3.1 2.6 18.5 2.8 10.0
TSE Steel Sales (MT) 2.6 2.6 2.3 13.0 2.4 8.3
Group Steel Sales (MT) 6.5 6.5 5.7 13.2 5.8 11.2
TSI EBITDA/tonne (|/tonne) 10,959 10,959 7,297 50.2 10,786 1.6 TSI EBITDA/tonne came in lower than our estimates
TSE EBITDA/tonne (US$/tonne) 44.9 43.9 67.2 -33.2 80.0 -43.9 TSE EBITDA/tonne came in lower than our estimates
TSI: Tata Steel India; TSE: Tata Steel Europe
Source: Company, ICICIdirect.com Research
Change in estimates
(| Crore) Old New % Change Old New % Change Comments
Total Operating Income (| crore) 130,651 130,858 0.2 135,858 134,790 (0.8) Downward revised estimates for both years on all fronts
EBITDA (| crore) 20,139 19,257 (4.4) 22,514 22,202 (1.4)
EBITDA Margin (%) 15.4 14.7 (4.5) 16.6 16.5 (0.6)
Adj PAT (| crore) 5,915 5,324 (10.0) 6,967 6,817 (2.1)
Adj EPS (|) 61.0 54.9 (10.0) 71.8 70.3 (2.1)
FY19EFY18E
Source: Company, ICICIdirect.com Research
Assumptions
Comments
FY17 FY18E FY19E FY18E FY19E
TSI Steel Sales (MT) 11.0 12.3 12.5 12.0 12.5 Upward revised sales volume estimates for FY18E
TSE Steel Sales (MT) 9.9 10.0 10.0 10.0 10.0 Maintained estimates
Group Steel Sales (MT) 23.9 26.8 27.0 26.5 26.5 Upward revised sales volume estimates
TSI EBITDA/tonne (|/tonne) 10,901 11,500 13,250 12,000 13,500 Revised downward for both years
TSE EBITDA/tonne (US$/tonne) 71.0 65.0 75.0 75.0 75.0 Revised downwards for FY18E, maintained for FY19E
TSI: Tata Steel India; TSE: Tata Steel Europe
EarlierCurrent
Source: Company, ICICIdirect.com Research
ICICI Securities Ltd | Retail Equity Research Page 3
Company Analysis
Healthy increase in domestic sales volume augurs well…
Tata Steel’s Indian operations continued to register healthy sales volume
growth during H1FY18 which increased 23% YoY. The sales volume
growth was notably higher compared to the domestic steel consumption
growth of 4.3% YoY during the same period reflecting increase in Tata
Steel’s market share domestically. We upward revise domestic sales
volume estimate for FY18E to 12.3 MT (from 12 MT earlier), and maintain
FY19E volume estimate of 12.5 MT.
Integrated Jamshedpur operations bode well in the long run……
The company’s Jamshedpur plant has access to captive raw materials
(100% integration for iron ore and ~35% integration for coking coal). This
enables TSL to realise superior EBITDA margins compared to its domestic
peers. Going forward, over the next couple of years, we expect Indian
operations to clock an EBITDA/tonne of ~| 11500-13250/tonne, higher
than its peers.
Exhibit 1: Domestic volumes to grow at CAGR of ~7% in FY17E-19E…
8.5 8.8
9.5
11.0
12.3 12.5
0
2
4
6
8
10
12
14
FY2014 FY2015 FY2016 FY2017 FY2018E FY2019E
million tonne
Source: Company, ICICIdirect.com Research
Exhibit 2: ..domestic EBITDA/tonne likely to augment further…
15043
11433
7388
1090111500
13250
0
2000
4000
6000
8000
10000
12000
14000
16000
18000
20000
FY2014 FY2015 FY2016 FY2017 FY2018E FY2019E
|/tonne
Source: Company, ICICIdirect.com Research
European operations report a muted EBITDA/tonne for Q2FY18...
The European operations reported a muted EBITDA/tonne of
~US$45/tonne (vs. US$80/tonne in Q1FY18, US$67/tonne in Q2FY17).
The EBITDA during the quarter was impacted by lower sales realisations
which declined to €470/tonne from €540/tonne in Q1FY18. The higher raw
material cost further impaired EBITDA.
We downward revise our EBITDA/tonne estimate for FY18E to
US$65/tonne (from US$75/tonne earlier) and maintain FY19E estimate of
US$75/tonne.
TSL India outshines domestic demand in FY15 & FY16
3.3
12.913.8
2.7
9.0
15.0
6.7
3.3
0.6
3.1
4.3
3
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
FY2012 FY2013 FY2014 FY2015 FY2016 FY2017
%
Tata Steel India YoY Domestic Steel Demand YoY
Source: Company, ICICIdirect.com Research
ICICI Securities Ltd | Retail Equity Research Page 4
Exhibit 3: Trend in Tata Steel’s Europe’s volume…
13.9 13.7
13.0
9.9 10.0 10.0
5.0
7.0
9.0
11.0
13.0
15.0
FY2014 FY2015 FY2016 FY2017 FY2018E FY2019E
million tonne
Source: Company, ICICIdirect.com Research
Exhibit 4: … TSE EBITDA/tonne to improve
34
50
-7
71
65
75
-20
-10
0
10
20
30
40
50
60
70
80
FY2014 FY2015 FY2016 FY2017 FY2018E FY2019E
US
$/tonne
Source: Company, ICICIdirect.com Research
Exhibit 5: Share of domestic sales volume in overall group sales
26.6
26.3
26.3
23.9
26.8
27.0
8.5
8.8
9.5
11.0
12.3
12.5
32
3336
4646
46
0
5
10
15
20
25
30
35
40
45
50
0
5
10
15
20
25
30
FY2014 FY2015 FY2016 FY2017 FY2018E FY2019E
%
million tonne
Tata Steel Group Tata Steel India India's Proportion to Total sales
Source: Company, ICICIdirect.com Research
Exhibit 6: Consolidated EBITDA margin trend
11.1
9.0
6.5
15.1 14.7
16.5
0
4
8
12
16
20
FY2014 FY2015 FY2016 FY2017 FY2018E FY2019E
%
Tata Steel Group
Source: Company, ICICIdirect.com Research
ICICI Securities Ltd | Retail Equity Research Page 5
Debt levels to remain stable
The net debt during the quarter increased by | 6600 crore QoQ to | 78303
crore (vs. | 71703 crore in Q1FY18) due to higher working capital outgo,
transition loss and onetime cash payment for regulated apportionment of
BSPS.
The gross debt of | 83014 crore as on March 31 2017 increased by | 1028
crore on a YoY basis. The net debt at | 72367 crore increased by | 1268
crore YoY. However, the same is expected to witness a declining trend in
FY18E and FY19E.
Exhibit 7: Net debt to remain stable
81986
83014
81414
80214
73635
72367
75567
72623
0
20000
40000
60000
80000
100000
FY2016 FY2017 FY2018E FY2019E
| c
rore
Gross Debt Net Debt
Source: Company, ICICIdirect.com Research, Net debt is Gross Debt minus Cash
ICICI Securities Ltd | Retail Equity Research Page 6
Key highlights of Tata Steel - Thyssenkrupp joint venture...
The proposed 50:50 joint venture – Thyssenkrupp Tata Steel would
focus on quality and technology leadership and supply of premium
and differentiated products to its customers
The management indicated both the parties envision a long term
association and would continue the present network configuration of
all the upstream hubs in the proposed joint venture
The management indicated the shareholders of both the parties have
taken care to ensure a sustainable business going forward
The synergies would primarily be derived from an integration of sales
and administration, research & development, a joint optimisation of
procurement, logistics and service centres. In addition to this,
Thyssenkrupp Tata Steel would seek to improve capacity utilisation of
the network across IJmuiden (Netherlands), Duisburg (Germany) and
Port Talbot (Wales, UK) and their related downstream facilities
The new proposed entity to have a debt of ~€ 6.5 billion, of which €
2.5 billion pertains to the debt on the book of Tata Steel Europe (TSE),
€ 3.6 billion of pension liabilities of Thyssenkrupp and the balance €
0.4 billion being legacy debt
The management indicated that the € 3.6 billion pension liabilities with
the JV is close ended and carries interest rate of 1.2%. Essentially it
forms debt with extremely low interest rate and no refinancing
liability.
The management indicated BSPS 2 will have significant pension
surplus at the start. The emphasis will be matching ALM and not
creating volatility like in the past
Post JV, the annual capex requirement on consolidated basis would
stand at ~€ 750 million, while the interest outgo will amount to ~€
300 million.
Tata Steel’s consolidated net debt as on date was at ~| 74000 crore.
Of this, ~| 40000 crore is in the books of Tata Steel India while ~|
17000 crore is on the books of Tata Steel Europe (which would be
transferred to new JV) and the balance ~| 17000 crore in the
Singapore subsidiary
The proposed JV would have high dividend payout benefiting both
the parties. Tata Steel indicated it will service the debt in the
Singapore entity through these dividends
The JV will be able to take benefit of the tax credits of loss making UK
facilities once profitable
The accounting for Tata Steel will be on equity basis and as such
there will be a one-line impact in the financials. Accounting will begin
post closure of the deal
The process will now enter the next phase in the transaction with due
diligence and negotiations on the definitive detailed agreements
(expected to be completed by March 2018). The combination is
further subjected to various shareholders’, anti-trust and other
regulatory approvals. By and large, the management expects the deal
to be concluded by December 2018 or March 2019
JV Pro forma financials
Tata Steel Thyssenkrupp
Indicative
Total
Deliveries (MT) 9.8 11.5 21.3
Turnover (€ Billion) 7.4 8.6 16.0
EBITDA (€ Billion) 0.7 0.9 1.6
Term Debt (€ Billion) - - 2.5
Source: Company, ICICIdirect.com Research, *June-17 (LTM)
ICICI Securities Ltd | Retail Equity Research Page 7
Conference call highlights & other key developments…
Global steel demand/supply position appears favourable with capacity
closures in China. Global steel production is up 5.6% YoY in 9MCY17
compared to the demand growth forecast of 7% in CY17
China has closed ~120 million tonne (MT) of capacity since the start
of 2016. Chinese steel demand is on an increasing trend. The
utilisation of mainstream steel producers has improved supported by
the closure of outdated induction furnaces. Chinese exports declined
to an annualised level of 75 MT in Q3CY17 compared to 118 MT in
Q2CY17. Regional steel prices have rebounded with improved
demand in China, better steel inventory levels and higher raw material
cost
Indian operations
Net sales realisation during the quarter was impacted by a) lower
ferrochrome prices (impact of ~| 550/tonne QoQ) and b) changes in
business model of tinplate (impact of ~| 1000/tonne QoQ)
During the quarter, prices of flat products increased ~| 2000/tonne,
while long product realisations were relatively soft. Domestic steel
prices continue to be at a discount compared to international prices
Sales volumes during the quarter witnessed strong growth of ~18.5%
YoY and 10% QoQ largely supported by near full ramp up of the
Kalinganagar facility. The Kalinganagar facility is operating the blast
furnace at 100% while the utilisation level of downstream facilities is
at ~95%
The consumption cost of coking coal for Q2FY18 was at
US$155/tonne (vs. US$175/tonne in Q1FY18)
The branded and retail product segment grew 14% YoY and 16%
QoQ. The company captured demand growth in solar projects,
railways, yellow goods and PEB segment due to improved
government spending, festive season and re-stocking
Automotive steel sales grew 23% YoY and 14% QoQ. The company
enhanced its market share with focus on new grades development
and new vehicle models
The industrial products, project and exports segment grew ~60%
YoY and 18% QoQ in value added & new segments (PEB, L&E, C&P
and API). The company added new customers in PEB and L&E
segments. Tata Steel secured orders for water pipeline projects and is
witnessing better traction in MCHC and LPG segment
The overall outlook for the steel market remains buoyant. However, a
jump in steel imports during Q2FY18 poses a risk. Accelerating
government reforms are expected to result in stronger growth.
However, private sector investment still remains muted
The implementation of GST and increased tax transparency is
expected to facilitate the growth of organised players
The company expects rural demand to recover due to good
monsoon, higher MSP for crops, MNREGA and loan waivers
European operations
The eurozone economy grew 2.3% YoY in Q2CY17. UK economic
growth remained at 1.5% in Q3CY17
EU steel demand growth was at 1.5% YoY in H1CY17. During the
period, domestic deliveries increased 0.5% YoY while imports rose
8.3% YoY
Deliveries during Q2FY18 were up 15% YoY and 8% QoQ, in part due
to one-off sales and supply chain improvements
ICICI Securities Ltd | Retail Equity Research Page 8
Revenues were up 32% YoY and 5% QoQ reflecting higher deliveries
and an uplift in sales of differentiated products
The TSE EBIDTA/tonne was impacted by lower realisation (Q2FY18:
~ €470/tonne vs. Q1FY18: ~€540/tonne) and higher raw material
cost. The consumption cost of coking coal during the quarter was at
US$163/tonne
The EU economy is expected to grow ~2.2% in 2017. The UK
economy is forecast to grow ~1.5% as higher inflation weakens
consumer spending growth
European steel demand is expected to grow ~1.9% in 2017, in line
with the modest economic growth. European steel mills are expected
to continue to remain under pressure from imports
South East Asia Operations
South East Asia rebar spreads improved with higher steel prices in
domestic as well as exports market
Revenues increased 22% both YoY and QoQ to | 2424 crore. The
EBITDA improved to | 135 crore (vs. | 22 crore in Q1FY18) with
higher deliveries and improved spreads
Nat Steel Holdings production was up 11% YoY, 18% QoQ. Deliveries
were up 4% YoY, 7% QoQ despite weak domestic market conditions.
The EBITDA improved on higher volumes and better spreads. The
company will continue to focus on key markets for exports
Tata Steel Thailand’s deliveries increased 3% YoY and 17% QoQ. The
wire rod sales grew 81% YoY and 24% QoQ. Profitability during the
quarter improved on account of improved long product realisations
and deliveries
The company expects Singapore construction sector to improve with
commencement of the new projects. In Thailand, increase in public
investment on large scale infrastructure projects is expected to
support steel demand.
Other highlights
The management expects the cost of coking to decline by
~US$10/tonne in Q3FY18 for both Indian as well as European
operations
The management expects the Indian net sales realisations to increase
~|1000/tonne in Q3FY18.
The board has started with the engineer working plans in
Kalinganagar and is in an advanced phase. There is no delay in the
timelines and management has given guidance that hot metal
capacity will be of 5 million tonne (MT) in all probability.
The company’s Q2FY18 exports were at ~0.3 MT. The management
expects the full year exports to be ~1.1-1.2 MT in FY18.
The deferred tax takes into account the pension provisioning of £550
million, which was accounted as a settlement in other comprehensive
income (OCI). This has resulted in a tax rate of 52% in the quarter
The management indicated the company has no scheduled debt
repayment
The management maintained the capex guidance of ~| 7000 crore for
FY18. During the quarter, the company incurred capex of ~| 1834
crore. For H1FY18, the capex spend was at ~| 3380 crore
The gross debt during the quarter increased by | 2447 crore to
| 90259 crore primarily on account of increase in working capital lines
ICICI Securities Ltd | Retail Equity Research Page 9
and forex impact. The liquidity position of the group remains robust
with cash & cash equivalents and undrawn bank lines of | 19800 crore
The foreign exchange loss for the quarter was ~| 300 crore due to
translation effect of loans in Singapore
The company signed MoU for 50:50 joint venture with Thyssenkrupp
to create a leading European steel enterprise
The pensions regulator has approved the Regulatory Apportionment
Agreement with respect to BSPS and payment of £550 million has
been completed. The BSPS has been now separated from Tata Steel
UK and a number of affiliated companies. The next step would be
completion of necessary formalities to set up a new scheme with
lower risk profile following member consent process led by trustee
The company completed sale of 42-inch and 84-inch pipe mills in
Hartlepool to Liberty House group
Tata Steel has acquired full intellectual property rights in Hlsarna
Technology, which has the potential to reduce energy use and carbon
emissions by at least 20%, as well as reducing the steel making costs
through lower priced raw materials
The management believes India will be a net exporter of steel in FY18
ICICI Securities Ltd | Retail Equity Research Page 10
Outlook and valuation
Tata Steel’s Q2FY18 performance was marred by a fall in realisations and
increased costs. The company, however, continued to report healthy
sales volume growth (H1FY18: 23% YoY). We expect the benefits of
healthy increase in domestic steel prices and moderation in the raw
material cost to come with a lag. We downward revise EBITDA/tonne
estimates for TSI to | 11500/tonne (from | 12000/tonne earlier) for FY18E
and | 13250/tonne (from | 13500/tonne earlier) for FY19E. TSE
EBITDA/tonne estimate has been downward revised to US$65 /tonne
(from US$75/tonne earlier) for FY18E and maintained for FY19E at
US$75/tonne. We expect the potential joint venture to get through, post
which the European business will be housed in the JV with
Thyssenkrupp, lowering the impact at consolidated level on Tata Steel.
We incorporate the synergy benefit of |112/share from the potential JV in
our target price. Of this ~| 194/share comes from debt reduction, while
valuation of Tata Steel Europe reduces by |82/share due to farm out. We
value the stock on SOTP basis and arrive at target price of | 785. We
maintain BUY rating.
Exhibit 10: Valuation Matrix
Total Op. Income Growth EPS Growth PE EV/EBIDTA P/ BV RoNW RoCE
(| Crore) % YoY (|) % YoY (x) (x) (x) (%) (%)
FY15 138319 -6.1 NM NM NM 11.2 2.0 0.0 5.8
FY16 115952 -16.2 -23.1 NM NA 19.7 2.2 -7.3 2.1
FY17 111562 -3.8 42.2 LP 16.7 8.7 1.8 10.8 9.4
FY18E 129869 16.4 54.9 30.1 12.8 7.6 2.0 15.5 11.5
FY19E 133750 3.0 70.3 28.0 10.0 6.4 1.7 17.0 12.3
Source: Company, ICICIdirect.com Research
Exhibit 8: Target price calculation
| crore
Tata Steel India EBITDA FY19E (A) 16564
EV/EBITDA Multiple Assigned (B) 7
Other Subs EBITDA FY18E (C) 764
EV/EBITDA Multiple Assigned (D) 5
Tata Steel Total EV (E = A*B + C*D) 111487
Tata Steel Gross Debt 61359
Cash & Cash Eq (G) 10775
Minority Interest (H) 1492
Net Debt (I = F-G+H) 52076
Add: 50% stake valuation in potential European steel JV (J) 16381
Add: Investments valued at 30% discount (K) 385
Arrived Market Capitalisation (L= E-I+J+K) 76177
No. of Shares 97
Target Price (|) 785
Source: Company, ICICIdirect.com Research
Exhibit 9: Tata Steel – Thyssenkrupp JV (Synergy value based on JV assumptions)
Volume (MT) 21
EBITDA/tonne (|/tonne) 6500
EBITDA (| crore) 13650
Multiple (x) 6
EV (| crore) 81900
Debt (| crore) 49138
Mcap (| crore) 32762
Tata Share (50%) (| crore) 16381
Source: Company, ICICIdirect.com Research
ICICI Securities Ltd | Retail Equity Research Page 11
Recommended History vs. Consensus Chart
0.0
10.0
20.0
30.0
40.0
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Oct-17Aug-17Jun-17Mar-17Jan-17Oct-16Aug-16May-16Mar-16Jan-16
(%
)(|)
Price Idirect target Consensus Target Mean % Consensus with BUY
Source: Bloomberg, Company, ICICIdirect.com Research
Key events
Date Event
May-17
India Ratings (Ind-Ra) maintains rating watch evolving (RWE) on Tata Steel's credit rating of IND AA/IND A1+. The RWE reflects the uncertainty regarding the
divestments and/or formation of joint ventures (JVs) pertaining to TSL’s European operations. Ind-Ra expects to resolve the rating watch by October 2017, after it
gains greater clarity on the same
Jun-17 Tata Steel sells 8.35 crore shares of Tata Motors to Tata Sons at a price of | 452.8/ share (excluding brokerage and STT) resulting into a cash inflow of | 3783 crore.
Jun-17 Tata Steel completes disinvestment of its entire equity stake in the 50% joint venture Tata Elastron SA to Elastron SA for a consideration of € 0.37 million
Jun-17
Tata Steel completes sale of its 42 inch and 84 inch submerged arc weld (SAW) pipe mills in Hartlepool to Liberty House Group. The two mills are independent of the
company's strip products supply chain in the UK. Tata Steel did not disclose the consideration involved in the deal
Aug-17
Tata Steel has signed an agreement on segregating the company’s UK business from its pension scheme that will potentially free it up to pursue strategic options for
the unit. As part of the arrangement, Tata Steel UK will make a payment of £550 million to the British Steel Pension Scheme (BSPS) while 33% of Tata Steel UK’s
equity will be issued to the scheme’s trustee
Sep-17
Tata Steel UK has received confirmation from The Pensions Regulator regarding approval of Regulated Apportionment Arrangement (RAA) with respect to the British
Steel Pension Scheme (BSPS). As part of RAA, Tata Steel UK has made a payment of £ 550 million and issued shares equivalent to a 33% stake in the company to
the BSPS Trustee under the terms of a shareholder's agreement
Sep-17
Tata Steel and Thyssenkrupp AG have signed an MoU to combine their respective flat steel businesses in Europe and for the steel mill services. The proposed JV
would be named Thyssenkrupp Tata Steel which will have annual shipments of ~21 million tonne (MT) and is likely to have a proforma turnover of ~ €15 billion per
annum (|115000 crore). The JV would be formed through a non cash transaction framework, based on fair valuation where both shareholders would contribute debt
and liabilities to achieve equal shareholding in the venture. The company intends to sign definitive agreement by March 2018 and is looking to close the deal by
December 2018 or March 2019
Oct-17
Tata Steel has acquired Rio Tinto's smelter technology and intellectual property rights required to operate Hisarna process. The technology removes a number of pre-
processing steps, resulting in significant efficiency gains and 20% reduction in energy use and carbon dioxide emissions as well as reducing steelmaking costs
through lower priced raw materials (up to half of which could be recycled scrap steel)
Source: Company, ICICIdirect.com Research
Top 10 Shareholders Shareholding Pattern
Rank Name Latest Filing Date % O/S Position (m) Change (m)
1 Tata Group of Companies 30-Jun-17 31.1 301.8 0.0
2 Life Insurance Corporation of India 30-Jun-17 11.9 115.3 -6.7
3 HDFC Asset Management Co., Ltd. 30-Jun-17 4.4 42.6 1.5
4 ICICI Prudential Asset Management Co. Ltd. 30-Jun-17 3.0 28.7 4.6
5 Reliance Nippon Life Asset Management Limited 30-Jun-17 2.5 24.5 0.9
6 Norges Bank Investment Management (NBIM) 30-Jun-17 1.2 12.1 1.1
7 Dimensional Fund Advisors, L.P. 31-Aug-17 1.1 10.6 0.0
8 The New India Assurance Co. Ltd. 30-Jun-17 1.1 10.4 -0.4
9 DSP BlackRock Investment Managers Pvt. Ltd. 30-Jun-17 1.0 9.7 0.6
10 BlackRock Institutional Trust Company, N.A. 30-Sep-17 1.0 9.5 -0.1
Source: Reuters, ICICIdirect.com Research
(in %) Sep-16 Dec-16 Mar-17 Jun-17 Sep-17
Promoter 31.4 31.4 31.4 31.4 31.4
FII 13.6 13.0 14.0 13.7 15.7
DII 29.2 30.8 30.7 30.3 29.7
Others 25.8 24.8 23.9 24.7 23.3
Recent Activity
Investor name Value (m) Shares (m) Investor name Value (m) Shares (m)
ICICI Prudential Asset Management Co. Ltd. 39.0 4.6 Life Insurance Corporation of India -56.7 -6.7
HDFC Asset Management Co., Ltd. 13.1 1.5 APG Asset Management -43.9 -5.9
Norges Bank Investment Management (NBIM) 9.3 1.1 Lyxor Asset Management -8.3 -1.1
Reliance Nippon Life Asset Management Limited 7.9 0.9 T. Rowe Price Associates, Inc. -6.5 -0.8
Allianz Global Investors U.S. LLC 6.1 0.6 Amundi Asset Management -4.3 -0.5
Buys Sells
Source: Reuters, ICICIdirect.com Research
ICICI Securities Ltd | Retail Equity Research Page 12
Financial summary (Consolidated)
Profit and loss statement (| crore)
(Year-end March) FY16 FY17 FY18E FY19E
Net Sales 115951.7 111562.1 129868.6 133749.7
Other Operating Income 1199.9 737.4 989.8 1040.5
Total Operating Income 117151.6 112299.4 130858.4 134790.1
Growth (%) -16.2 -3.8 16.4 3.0
Raw Material Expenses 44816.1 39304.9 51922.2 51643.6
Employee Expenses 19966.8 17252.2 18492.7 19162.0
Purchase of Power 5433.6 0.0 7012.6 7082.5
Other expenses 39349.4 38734.5 34174.2 34699.9
Total Operating Expenditure 109565.9 95291.6 111601.8 112588.1
EBITDA 7585.6 17007.8 19256.6 22202.1
Growth (%) -39.5 124.2 13.2 15.3
Depreciation 5081.8 5672.9 6072.4 7491.3
Interest 4128.6 5072.2 5096.1 5112.1
Other Income 3925.7 527.5 561.6 565.3
PBT 2300.8 6790.2 8649.8 10164.0
Exceptional Item -3974.9 -4316.6 -617.0 0.0
Total Tax 1505.0 2778.0 2650.8 3294.5
PAT -3179.0 -304.4 5382.0 6869.5
Growth (%) LP -90.4 -1868.2 27.6
Minorities, Associates etc 129.7 -64.2 -57.8 -52.0
Rep PAT after Assoc., MI -3049.3 -368.6 5324.2 6817.5
Adj PAT after Assoc., MI -2243.2 4092.1 5324.2 6817.5
Growth (%) NM -282.4 30.1 28.0
EPS (|) -23.1 42.2 54.9 70.3
Source: Company, ICICIdirect.com Research
Cash flow statement (| crore)
(Year-end March) FY16 FY17 FY18E FY19E
Profit after Tax -3049.3 -368.6 5324.2 6817.5
Add: Depreciation 5081.8 5672.9 6072.4 7491.3
(Inc)/dec in Current Assets -3635.8 6666.0 -6798.4 -1282.4
Inc/(dec) in CL and Prov. 1701.3 -1134.7 8773.3 191.3
Others 20.4 7125.2 0.0 0.0
CF from operating activities 118.4 17960.8 13371.4 13217.6
(Inc)/dec in Investments -3345.6 -5736.1 4959.1 -4000.0
(Inc)/dec in Fixed Assets -4128.3 -27551.4 -6383.0 -5200.0
Others -49.6 -52.5 -57.8 -52.0
CF from investing activities -7523.5 -33340.1 -1481.7 -9252.0
Issue/(Buy back) of Equity 0.0 -20.0 0.0 0.0
Inc/(dec) in loan funds 5503.0 -3190.0 -1600.0 -1200.0
Dividend paid & dividend tax 179.9 -908.1 -1021.7 -1021.7
Inc/(dec) in Share Cap 0.0 8342.2 -8342.2 0.0
Others -311.0 9360.6 0.0 0.0
CF from financing activities 5371.9 13584.7 -10963.9 -2221.7
Net Cash flow -2033.1 -1794.6 925.9 1743.9
Opening Cash 8748.8 6715.6 4921.1 5847.0
Closing Cash 6715.6 4921.1 5847.0 7590.9
Source: Company, ICICIdirect.com Research
Balance sheet (| crore)
(Year-end March) FY16 FY17 FY18E FY19E
Liabilities
Equity Share Capital 970.2 970.2 970.2 970.2
Hybrid Perpetual securities 2,275.0 2,275.0 2,275.0 2,275.0
Reserve and Surplus 27508.6 34574.1 31151.4 36947.2
Total Shareholders funds 30753.9 37819.3 34396.7 40192.5
Total Debt 86204.0 83014.0 81414.0 80214.0
Deferred Tax Liability 2904.9 10030.1 10030.1 10030.1
Minority Interest & Others 1674.2 1601.7 1543.9 1491.9
Total Liabilities 121537.0 132465.1 127384.6 131928.4
Assets
Gross Block 177463.1 183767.2 192767.2 206767.2
Less: Impairment 15692.0 0.0 0.0 0.0
Less: Acc Depreciation 89582.5 95255.4 101327.7 108819.0
Net Block 72188.6 88511.8 91439.5 97948.2
CWIP 10228.8 15784.1 13784.1 4984.1
Investments 6800.6 12536.7 7577.6 11577.6
Goodwill on Consolidation 13719.4 3494.7 3494.7 3494.7
Inventory 20356.0 24803.8 32006.9 30278.7
Debtors 11701.2 11586.8 14232.2 13191.7
Loans and Advances 19688.7 7587.4 4437.4 8388.4
Other Current Assets 1829.3 2931.1 3031.1 3131.1
Cash 6715.6 4921.1 5847.0 7590.9
Total Current Assets 60290.8 51830.2 59554.5 62580.8
Current Liabilities 29197.3 18574.5 28347.7 29539.0
Provisions 12515.8 22003.9 21003.9 20003.9
Current Liabilities & Prov 41713.1 40578.4 49351.7 49542.9
Net Current Assets 18577.7 11251.8 10202.8 13037.9
others 21.9 885.9 885.9 885.9
Application of Funds 121537.0 132465.1 127384.6 131928.4
Source: Company, ICICIdirect.com Research
Key ratios
(Year-end March) FY16 FY17 FY18E FY19E
Per share data (|)
Adj EPS -23.1 42.2 54.9 70.3
Cash EPS 29.3 100.6 117.5 147.5
BV 317.0 389.8 354.5 414.3
Adj BV (adj for Goodwill) 175.6 353.8 318.5 378.2
DPS 8.0 8.0 9.0 9.0
Cash Per Share 69.2 50.7 60.3 78.2
Operating Ratios (%)
EBITDA Margin 6.5 15.1 14.7 16.5
PBT / Total Operating income 2.0 6.0 6.6 7.5
Adj PAT Margin -1.9 3.6 4.1 5.1
Inventory days 185 210 225 214
Debtor days 39 38 40 36
Creditor days 261 199 175 216
Return Ratios (%)
Adj RoE -7.3 10.8 15.5 17.0
Adj RoCE 2.1 9.4 11.5 12.3
RoIC 2.3 9.8 12.0 13.0
Valuation Ratios (x)
P/E NA 16.7 12.8 10.0
EV / EBITDA 19.7 8.7 7.6 6.4
EV / Net Sales 1.3 1.3 1.1 1.1
Market Cap / Sales 0.6 0.6 0.5 0.5
Price to Book Value 2.2 1.8 2.0 1.7
Price to Adj Book Value 4.0 2.0 2.2 1.9
Solvency Ratios
Debt/EBITDA 11.4 4.9 4.2 3.6
Debt / Equity 2.8 2.2 2.4 2.0
Current Ratio 1.4 1.3 1.2 1.3
Quick Ratio 1.0 0.7 0.6 0.7
Source: Company, ICICIdirect.com Research
ICICI Securities Ltd | Retail Equity Research Page 13
ICICIdirect.com coverage universe (Metals & Mining)
CMP M Cap
(|) TP (|) Rating (| Cr) FY17 FY18E FY19E FY17 FY18E FY19E FY17 FY18E FY19E FY17 FY18E FY19E FY17 FY18E FY19E
Coal India 289 260 Hold 179332 14.9 16.2 17.5 18.8 17.4 16.1 9.9 9.4 8.7 33.5 33.3 32.4 37.8 35.7 34.3
Hindalco 273 260 Buy 60842 8.4 19.2 25.0 27.8 12.2 9.4 8.4 7.3 6.4 6.9 8.7 9.7 4.1 8.8 10.0
Hindustan Zinc 314 350 Buy 132559 19.7 25.6 29.5 16.0 12.3 10.6 11.1 8.1 6.0 26.9 35.7 34.8 27.0 28.6 27.2
JSW Steel 264 240 Buy 63778 14.3 20.8 22.0 15.1 10.4 9.9 7.7 6.9 6.7 13.4 14.8 14.2 15.3 18.8 16.9
Vedanta 341 285 Hold 101092 15.1 27.6 34.1 18.2 10.0 8.1 5.3 4.6 3.9 12.1 14.2 15.3 9.3 15.0 16.0
Tata Steel 705 785 Buy 64909 42.2 54.9 70.3 16.7 12.8 10.0 8.7 7.6 6.4 9.4 11.5 12.3 10.8 15.5 17.0
ROCE(%)EV/EBITDA (x) ROE(%)EPS (|) P/E (x)
Company
Source: Company, ICICIdirect.com Research
ICICI Securities Ltd | Retail Equity Research Page 14
RATING RATIONALE
ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns
ratings to its stocks according to their notional target price vs. current market price and then categorises them
as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional
target price is defined as the analysts' valuation for a stock.
Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction;
Buy: >10%/15% for large caps/midcaps, respectively;
Hold: Up to +/-10%;
Sell: -10% or more;
Pankaj Pandey Head – Research pankaj.pandey@icicisecurities.com
ICICIdirect.com Research Desk,
ICICI Securities Limited,
1st Floor, Akruti Trade Centre,
Road No 7, MIDC,
Andheri (East)
Mumbai – 400 093
research@icicidirect.com
ICICI Securities Ltd | Retail Equity Research Page 15
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