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In the interest of timeliness, this document is not edited Centrum Equity Research is available on Bloomberg, Thomson Reuters and FactSet

Elephant set to dance despite getting enormous We see Usha Martin (UML) steel business acquisition as a smart move given the attractive discount of 30% to greenfield cost for a well-integrated asset providing product diversification and synergy benefits. We see that Net Debt/EBITDA for consolidated operations including both Bhushan (BSL) and UML (excl. European business which is getting shifted to JV) is likely to remain in a comfortable zone of 3.1x in FY20E (vs 2.9x at FY18 end) led by strong cash flows of domestic business given the favorable steel cycle and low cost metrics. We expect TSL to abandon any further inorganic acquisition efforts in medium term given its five year goal of doubling capacity in India is well within reach now. Upgrade to Buy with a SOTP based TP of Rs800 as we expect both Bhushan steel and Usha Martin acquisitions to be value accretive in medium term.

� Usha Martin acquisition appears a well thought out move: We see Usha Martin (UML) acquisition as a smart and well thought out move by TSL done at 30% discount to Greenfield capex cost as the plant has strong backward integration and attractive long product portfolio in close vicinity to TSL’s facilities. We believe that several operational issues have plagued UML’s operational performance over the years and expect TSL to achieve a much better operational and financial performance from the same asset. We see several synergies led by TSL’s application of its best practices on the overall management and functioning of the steel plant and expect EBITDA improvement of Rs1500-2000/t. We also expect TSL to abandon its further inorganic acquisitions efforts now given that UML has given the long product exposure that it was looking for. Though the acquisition looks pricey on trailing financials but we believe that same is not representative of the potential and hence an undue attention to the same might be unwarranted.

� Net Debt/EBITDA remains in comfortable zone despite acquisitions: Despite factoring in the acquisitions of both Bhushan and Usha Martin, we estimate that Net Debt/EBITDA for consolidated operations (excl. European business) is expected to remain in a comfortable zone of 3.1x (vs 2.9x at FY18 end) which allays street’s concerns on the balance sheet again getting stretched for Tata Steel (refer Exhibit 10 on Page 9). We believe that much larger asset base of Tata Steel’s own domestic business, shifting of European business to JV with ThyssenKrupp and its large cash flow in current steel cycle would help keep balance sheet in healthy position.

� Outlook – Spreads & cash flows are strong, management focus hereon to be key: TSL is currently enjoying strong spreads and cash flows in its domestic led by strong steel pricing, backward integration benefits and improved conversion cost metrics. Management’s goal of doubling capacity in India over 5 years is within reach with acquisition of 6 mtpa capacities and KPO phase 2 expansion of 5 mtpa and hence the focus hereon should ideally shift to deleveraging. We would keenly look for management’s views on further participation for inorganic growth but expect the same to get halted now and hence also expect TSL to not pursue Bhushan power & steel now. We adjust our costs & steel pricing estimates and build EBITDA/t of Rs15646/15300 for FY19E/20E for domestic operations. Our consolidated EBITDA estimates are revised higher marginally.

� Valuation and risks – Upgrade to Buy: We see the domestic asset acquisitions being value accretive in medium to long term due to attractive product portfolios and strong possibility of material synergies. We also draw comfort on balance sheet front due to shifting of European operations to JV and strong cash flow generation in residual business led by low cost domestic operations. We value TSL on SOTP methodology and despite getting negative contributions from both Bhushan and Usha Martin businesses in FY20E; we arrive at a fair value of Rs800. Upgrade to Buy. Key downside risk is sharp fall in steel prices & spreads and more asset acquisitions.

Target Price Rs800 Key Data

CMP* Rs625 Bloomberg Code TATA IN

Upside 28% Curr Shares O/S (mn) 1,126.5

Previous Target Rs705 Diluted Shares O/S(mn) 1,126.5

Previous Rating Hold Mkt Cap (Rsbn/USDbn) 704.2/9.9

Price Performance (%)* 52 Wk H / L (Rs) 747.9/493

1M 6M 1Yr 5 Year H / L (Rs) 747.9/188.2

TATA IN 9.4 10.4 1.4 Daily Vol. (3M NSE Avg.) 9268763

NIFTY (3.6) 11.5 11.8

*as on 21 September 2018; Source: Bloomberg, Centrum Research

Shareholding pattern (%)*

Jun-18 Mar-18 Dec-17 Sep-17

Promoter 33.1 33.2 31.4 31.4

FIIs 15.8 18.5 17.1 15.7

Dom. Inst. 29.3 26.7 28.4 29.6

Public 21.8 21.6 23.2 23.4

Source: BSE, *as on 21 September 2018

Earnings Revision (Cons)

Particulars (Rsbn)

FY19E FY20E

New Old Chg (%) New Old Chg (%)

Sales 1,470.3 1,424.7 3.2 1,443.8 1,422.2 1.5

EBITDA 263.3 260.2 1.2 273.4 270.9 0.9

EBITDA Margin (%) 17.9 18.3 18.9 19.0

PAT-adj. 107.8 104.9 2.8 117.9 115.8 1.9

Source: Centrum Research Estimates

Centrum vs. Bloomberg Consensus*

Particulars (Rsbn)

FY19E FY20E

Centrum BBG Chg (%) Centrum BBG Chg (%)

Net Sales 1,470.3 1,515.6 (3.0) 1,443.8 1,484.5 (2.7)

EBITDA 263.3 273.7 (3.8) 273.4 274.5 (0.4)

PAT-adj. 107.8 92.5 16.6 117.9 95.1 24.0

Bloomberg Consensus* Centrum Target Price (Rs)

Variance (%)

BUY SELL HOLD Target Price

(Rs)

24 1 3 754 800 6.1

*as on 21 September 2018; Source: Bloomberg, Centrum Research Estimates

AAbhisar Jain, CFA, [email protected], 91 22 4215 9928 Sahil Sanghvi, [email protected], 91 22 4215 9203

Y/E Mar (Rs bn) Revenue YoY (%) EBITDA EBITDA (%) Adj. PAT YoY (%) Adj. EPS (Rs) RoE (%) RoCE (%) PE (x) EV/EBITDA (x)

FY16 1,019.6 (26.9) 79.6 7.8 5.9 NM 6.1 1.3 1.7 44.5 13.6

FY17 1,122.9 10.1 170.0 15.1 40.1 578.7 41.4 9.9 6.7 9.5 7.1

FY18 1,317.0 17.3 218.9 16.6 81.0 101.6 70.8 16.4 8.6 8.8 6.9

FY19E 1,470.2 11.6 263.3 17.9 107.8 33.0 89.6 16.0 9.4 7.0 6.0

FY20E 1,443.8 (1.8) 273.4 18.9 117.9 9.4 98.0 15.0 9.5 6.4 5.5

Source: Company, Centrum Research Estimates

BUY Metals

Company Update 24 September 2018

INDIA

Tata Steel

Exhibit 1:

Iron Making Module (ktpa)

DRI

Hot Metal

Pellet

Sinter

Coke

Source: Company, Centrum Research

Exhibit 3:


Exhibit 1: Usha Martin Steel Asset Snapshot

Iron Making Module (ktpa)

Hot Metal

Company, Centrum Research

Exhibit 3: UML Steel


2

Usha Martin acquisition cost

Attractive

Usha Martin (UMJamshedpur and is one of the India’s largest speciality steel plant in long product segmenthas strong backward integrationdevelopment coal mine (which was won in the coal block auctions)

UML has semiwith further forward integration into long products to the extent of ~700 ktpaUML’s steel assets have been expanded in a big way in last decade and several plants and equipment are not too oldcoke oven plants were set

Usha Martin Steel Asset Snapshot

Iron Making Module (ktpa) Steel Making Module (ktpa)

600 Billets

600 Wire Rod

1,200 Blooms

800 TMT Bars

400 Section Bars

Company, Centrum Research

Process route

UML’s steel making route is Blast Furnace & DRI Kiln, Electric Arc Furnace, Ladle Refining Furnace, Vacuum Degassing and Continuous Casting 245 cubic metre and 380 cubic metre and 3 Electric Arc Furnaces having capacity of 40 MT (2 Nos) and 70 MT (1 No).

UML Steel manufacturing process flow


Usha Martin acquisition cost

Attractive long products steel b

Usha Martin (UML) boasts of an attractive manufacturing base with Jamshedpur and is one of the India’s largest speciality steel plant in long product segmenthas strong backward integrationdevelopment coal mine (which was won in the coal block auctions)

UML has semi-finished steel capacity above 1 mtpa and steelmaking capacity of 1 mtpa at billetwith further forward integration into long products to the extent of ~700 ktpaUML’s steel assets have been expanded in a big way in last decade and several plants and equipment are not too old. UML had setcoke oven plants were set


Steel Making Module (ktpa)

Billets

Wire Rod

Blooms

TMT Bars

Section Bars

Process route is combination of BF+DRI

UML’s steel making route is Blast Furnace & DRI Kiln, Electric Arc Furnace, Ladle Refining Furnace, Vacuum Degassing and Continuous Casting 245 cubic metre and 380 cubic metre and 3 Electric Arc Furnaces having capacity of 40 MT (2 Nos) and 70 MT (1 No).

manufacturing process flow

Usha Martin acquisition

long products steel b

L) boasts of an attractive manufacturing base with Jamshedpur and is one of the India’s largest speciality steel plant in long product segmenthas strong backward integrationdevelopment coal mine (which was won in the coal block auctions)

finished steel capacity above 1 mtpa and steelmaking capacity of 1 mtpa at billetwith further forward integration into long products to the extent of ~700 ktpaUML’s steel assets have been expanded in a big way in last decade and several plants and equipment

UML had set-up BF2 in 2010 and subcoke oven plants were set-up in 2013.


Steel Making Module (ktpa)

1,000

400

275

72

50

is combination of BF+DRI

UML’s steel making route is Blast Furnace & DRI Kiln, Electric Arc Furnace, Ladle Refining Furnace, Vacuum Degassing and Continuous Casting 245 cubic metre and 380 cubic metre and 3 Electric Arc Furnaces having capacity of 40 MT (2 Nos) and

manufacturing process flow

Usha Martin acquisition – attractive asset at

long products steel business with backward integration

L) boasts of an attractive manufacturing base with Jamshedpur and is one of the India’s largest speciality steel plant in long product segmenthas strong backward integration with captive iron ore mine of 2.5 mtpa capacity and under development coal mine (which was won in the coal block auctions)


up BF2 in 2010 and subup in 2013.

Exhibit 2:

000

400

275

72

50

s

Name

Reserves (mtpa)

Grade

Capacity (mtpa)

Distance from Plant


is combination of BF+DRI

UML’s steel making route is Blast Furnace & DRI Kiln, Electric Arc Furnace, Ladle Refining Furnace, Vacuum Degassing and Continuous Casting 245 cubic metre and 380 cubic metre and 3 Electric Arc Furnaces having capacity of 40 MT (2 Nos) and

attractive asset at

usiness with backward integration

L) boasts of an attractive manufacturing base with Jamshedpur and is one of the India’s largest speciality steel plant in long product segment

captive iron ore mine of 2.5 mtpa capacity and under development coal mine (which was won in the coal block auctions)


up BF2 in 2010 and subsequently set up its DRI 4 & 5 in 2012. Pellet and

Exhibit 2: Mining assets of Usha Martin

Name

Reserves (mtpa)

Grade

Capacity (mtpa)

Distance from Plant


is combination of BF+DRI– EAF route

UML’s steel making route is Blast Furnace & DRI Kiln, Electric Arc Furnace, Ladle Refining Furnace, Vacuum Degassing and Continuous Casting Machines. UML has 2 Blast Furnaces having capacity of 245 cubic metre and 380 cubic metre and 3 Electric Arc Furnaces having capacity of 40 MT (2 Nos) and

attractive asset at discount to replacement


L) boasts of an attractive manufacturing base with 1 MTJamshedpur and is one of the India’s largest speciality steel plant in long product segment

captive iron ore mine of 2.5 mtpa capacity and under development coal mine (which was won in the coal block auctions).


sequently set up its DRI 4 & 5 in 2012. Pellet and

Mining assets of Usha Martin


EAF route

UML’s steel making route is Blast Furnace & DRI Kiln, Electric Arc Furnace, Ladle Refining Furnace, Machines. UML has 2 Blast Furnaces having capacity of

245 cubic metre and 380 cubic metre and 3 Electric Arc Furnaces having capacity of 40 MT (2 Nos) and

discount to replacement


MTPA integrated steel plant near Jamshedpur and is one of the India’s largest speciality steel plant in long product segment

captive iron ore mine of 2.5 mtpa capacity and under

finished steel capacity above 1 mtpa and steelmaking capacity of 1 mtpa at billetwith further forward integration into long products to the extent of ~700 ktpa. UML’s steel assets have been expanded in a big way in last decade and several plants and equipment

sequently set up its DRI 4 & 5 in 2012. Pellet and

Mining assets of Usha Martin

Iron Ore Mine

Vijay II

100

62% Fe

2.5

160 Kms



Tata Steel


integrated steel plant near Jamshedpur and is one of the India’s largest speciality steel plant in long product segment. The


finished steel capacity above 1 mtpa and steelmaking capacity of 1 mtpa at billet We also note that

UML’s steel assets have been expanded in a big way in last decade and several plants and equipment sequently set up its DRI 4 & 5 in 2012. Pellet and

Coal Mine

Brinda



Tata Steel


integrated steel plant near The asset


finished steel capacity above 1 mtpa and steelmaking capacity of 1 mtpa at billets level We also note that

UML’s steel assets have been expanded in a big way in last decade and several plants and equipment sequently set up its DRI 4 & 5 in 2012. Pellet and

Coal Mine

Brinda-Sisai

25

F-G

0.7

170 Kms



3 Tata Steel

UML’s steel business has generated muted EBITDA despite integration

UML steel business has operated at ~70% capacity utilisations at finished steel level in last five years and generated average EBITDA/t of ~Rs5400/t with peak EBITDA of Rs7200/t. We believe that several operational issues have plagued UML’s operational performance over the years and weak management capabilities have also contributed to the overall muted show. We believe that Tata Steel would be able to achieve a much better operational and financial performance from the same asset and discuss the possible synergies in detail below.

Exhibit 4: UML Steel business track record

(Rs bn) FY14 FY15 FY16 FY17 FY18

Revenues 25.3 30.0 27.6 22.5 26.3

EBITDA 4.7 4.7 1.9 3.2 3.4

Margins - % 18.4 15.6 7.0 14.1 13.0

Volumes (Billets) (kt) 645 711 694 670 621

EBITDA/t (Rs) 7,221 6,582 2,764 4,746 5,516


Several synergies likely for Usha Martin as Tata applies its best practices

We expect several synergies at Usha Martin led by Tata steel’s application of its best practices on the overall management and functioning of the steel plant. We see several natural and material benefits accruing in the below areas:-

� Sourcing of raw materials (especially coal) – We expect reduction in coking coal procurement cost by ~US$10/t as Tata Steel has access to best in class cost metrics on account of its large buying at global level. UML has captive coal mines won in coal auctions in 2015 which are still to get operational and are under development stage which could get fast tracked by Tata. Also UML’s own iron ore mines have remained operational with 2.5 mtpa output and Tata could save on mining and logistics cost. Ramp-up in output of sinter & pellet plants could also lead to increase efficiency on raw material front.

� Reduction in consumables & additives – Tata has world’s best benchmarks in per tonne consumption of consumables & additives at its steel plants. We expect savings in procurement cost of additives and consumables as well as possible reduction in per tonne consumption ratios which could lead to cost savings in production.

� Operational efficiencies – We see strong scope of operational efficiencies as Tata would make efforts to increase the capacity utilisation of the plant from 65% at billet level to optimum levels (90%+) in the shortest possible period which we expect to be ~2 years. We expect savings in labour, power and logistics front on per tonne basis led by economies of scale.

� Centralised marketing & sales – We also expect better market penetration & sales on account of access to Tata’s centralised marketing & sales team.

On a combined basis, we believe that synergy benefits could add Rs1500-2000/t incremental EBITDA to UML’s assets.

4 Tata Steel

UML’s FY20E EBITDA/t could be ~Rs9000/t and at 80% capacity utilisation would imply acquisition multiple of 6.3x for Tata Steel

We present below the implied valuations on trailing and forward basis. With our expectations of material benefits from common synergies and also ramp-up in production, we expect UML to achieve volumes of 0.8 MT and EBITDA of ~Rs9000/t in FY20E as Tata applies its best practices to the operations and our expectation of steel pricing cycle remaining favorable particularly in longs. This would imply EV/EBITDA valuation of 6.3x ascribed by Tata Steel which is fair in our view considering the attractiveness of the asset and large discount to replacement/Greenfield cost at which the asset has been purchased. So we believe that undue attention to high valuation on trailing financials might be unwarranted. We also note that UML had an EBITDA/t of ~Rs10,000 in Q1FY19 led by better spreads.

Exhibit 5: UML Steel EBITDA and implied valuation

TTM FY18 FY20E

EBITDA (Rs mn) 4,580 3,425 7,200

EBITDA/t 7,340 5,515 9,000

Volumes (Billets) - kt 624 621 800

EV Paid (Rs bn) 45 45 45

Implied EV/EBITDA 9.8 13.1 6.3

Plant Capacity - mtpa 1

EV/Tonne (Rs/t) 45,000

EV/Tonne (US$/t) 625

Capex for Greenfield Plant (Rs bn) 65

Savings (vs Greenfield) (%) 31%


5 Tata Steel

Bhushan steel acquisition provides smart medium term growth and synergy opportunities

Bhushan steel has attractive EBITDA/t profile which has been at ~0.8x of Tata Steel India EBITDA/t historically

Bhushan steel (BSL) boasts of an attractive manufacturing base with 5.5 MT crude steel capacity comprising of 5 MT HR capacity and forward integration into value added products (CR, GP/GC) to the extent of 2 MT (40% share). BSL boasts of a solid track record in EBITDA/t over the last 10 years and has generated peak EBITDA/t of ~Rs14500/t in FY13. Even during the worst of steel pricing down cycle in FY16, BSL could generate a respectable EBITDA/t of ~Rs6500/t.

We also note that BSL EBITDA/t has consistently remained at ~0.8x of Tata Steel India’s EBITDA/t in the period (FY12-17) and this was led by solid market positioning of BSL in flat products combined with its high value added product profile. BSL has enjoyed very little backward integration (iron ore & coking coal) in comparison to Tata Steel (100% captive iron ore and 40% captive coking coal).

Exhibit 6: Bhushan EBITDA/t track record is solid barring the dip in recent years

Exhibit 7: Bhushan EBITDA/t has consistently been at ~0.8x of Tata Steel India EBITDA/t barring FY18

Source: Company, Centrum Research Source: Company, Centrum Research

Several synergies likely for Bhushan steel as Tata applies its best practices

We expect several synergies at Bhushan steel led by Tata steel’s application of its best practices on the overall management and functioning of the steel plant. We see several natural and material benefits accruing in the below areas:-

� Sourcing of raw materials (especially coking coal) – We expect reduction in coking coal procurement cost by US$5-10/t as Tata Steel has access to best in class cost metrics on account of its large buying at global level. Over long term, there is a case for captive iron ore integration for Bhushan steel assets from Tata’s captive iron ore mines but we believe that this is not an immediate trigger. Also BSL’s own iron ore mines have remained non-operational till now. Any quick movement on getting clearances for sourcing a part of iron ore for Bhushan steel from Tata’s captive mines would be an additional trigger.

� Reduction in consumables & additives – Tata has world’s best benchmarks in per tonne consumption of consumables & additives at its steel plants. We expect savings in procurement cost of additives and consumables as well as possible reduction in per tonne consumption ratios which could lead to cost savings in production.

� Operational efficiencies – We see strong scope of operational efficiencies as Tata would make efforts to increase the capacity utilisation of the plant from 70% to 100% in the shortest possible period which we expect to be ~2 years. We expect meaningful savings in labour, power and logistics front on per tonne basis led by economies of scale.

� Centralised marketing & sales – We also expect better market penetration & sales on account of access to Tata’s centralised marketing & sales team.

On a combined basis, we believe that synergy benefits could add ~Rs1000/t incremental EBITDA to Bhushan assets.

11,218

13,133

13,731

14,469

12,256

8,704

6,456

8,784

6,483

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18

mn tonnes

EBITDA/t (Rs) Volume - RHS

1.0

0.8 0.8 0.8 0.8

0.5

0.0

0.2

0.4

0.6

0.8

1.0

1.2

0

4000

8000

12000

16000

FY13 FY14 FY15 FY16 FY17 FY18

%Rs

Bhushan Tata Steel India Bhushan/Tata Steel - RHS

6 Tata Steel

Bhushan asset to provide brownfield growth optionality post FY20

BSL started business as a secondary steel producer which specialised in being an efficient converter in flat products on the value added side. It started business at Sahibabad (Uttar Pradesh) with a CR capacity of 120 ktpa. This plant was gradually scaled up to 475 ktpa by 1997, with further value addition modules of galvanizing coil and sheet (225ktpa) and corrugated sheet. The plant majorly caters to OEMs in the domestic market. In 2004, a plant in Khopoli (Maharashtra) was commissioned with configuration similar to the Sahibabad plant, with thrust on further value added products such as hardened and tempered coil (H&T), precision tubes, high tensile steel strapping (HTSS), color coated sheet, galvanised coil and sheet. The plant has a manufacturing capacity of 425 ktpa.

During the steel cycle boom of 2003-07, BSL ventured into primary steelmaking by setting up a steel plant at Orissa and embarked upon a major expansion plan in three phases (in Orissa) to set up feed facilities of hot metal, sponge iron, slabs, HR and billets for its current product portfolio of value added products. Majority of BSL expansions were completed by FY14 leading to crude steel capacity of 5.5 MTPA with flat products saleable capacity of ~5 MT split well between HR and value added products.

We understand that the current facility of Bhushan steel at Orissa would allow Tata the legroom to increase capacity to 8 MTPA and this optionality is likely to be pursued post FY20 and is likely to result in increased capacity creation at attractive capex cost thereby ensuring a long runway of growth for Tata in the domestic market.

BSL’s FY20E EBITDA/t could be ~Rs12000/t implying acquisition multiple of 7x for Tata which is fair considering the long term potential

With our expectations of material benefits from common synergies and also ramp-up in production, we expect BSL to achieve volumes of 4.5 MT and EBITDA of ~Rs12000/t (similar to historical 0.8x average to Tata steel). This would imply EV/EBITDA valuation of 7x ascribed by Tata Steel (including incremental investment) which is fair in our view considering the long term potential of the asset and opportunity cost in creating a new greenfield asset in India.

Exhibit 8: Bhushan Steel EBITDA and implied valuation

(Rs bn) FY19E FY20E

Sales Volumes (MT) 3.5 4.5

EBITDA/t (Rs) 11,000 12,000

EBITDA 38.5 54

Tata Steel Acquisition Cost

Upfront Payment

352

Operational Creditors Dues 12

Debottlenecking & Ramp-up Capex 15

Total Acquisition Cost 379

Implied EV/EBITDA (x) 7.0


7 Tata Steel

European steel JV with ThyssenKrupp to culminate years of restructuring and turnaround process

We remain positive on the transfer of European assets to JV (with ThyssenKrupp) which would result in better balance sheet and improved cash flow management for Tata thereby bringing to an end several years of restructuring & turnaround process at its European operations. We believe that deal is likely to get executed by CY18 end as per plans.

JV key features

� JV to be positioned as strong quality and technology leader with No. 2 position in the European markets. New entity to have pro-forma sales of about €17 billion and a workforce of about 48,000, currently at 34 locations. Shipments are expected to be above 21 MTPA

� Signing of agreement executed in June 2018 and closing is expected by FY19-end after receipt of all approvals.

� Annual synergies of €400 million to €500 million expected. These are identified synergies which are anticipated largely from integrating sales, administration, research and development, joint optimization of procurement, logistics and service centres as well as improved capacity utilization in downstream processing. Additional synergies from working capital and capex effects are expected to be additional.

� Reduction of about 2,000 employees in administration and up to 2,000 employees in production jointly shared between JV partners.

� The JV would operate as a separate entity and likely to be reported as one line item in balance sheet and P&L. It would help deconsolidation of Tata steel Europe and identifies liabilities from the Tata steel group balance sheet.

� Dividends at high payout ratio would be distributed to JV partners.

� JV would issue warrants to thyssenkrupp equivalent to 10% of equity capital which can be monetised by way of an IPO of the JV entity and the timing of the IPO can be exclusively decided by thyssenkrupp. As per thyseenkrupp’s estimates they would be able to get a compensation of ~€500mn from this which implies a valuation of ~€5bn at the time of IPO for the JV entity.

Key Highlights of deal structure & implications for Tata Steel

� Tata to transfer 2.5bn euros of debt (~Rs170bn) to the JV while thyssenkrupp would transfer ~4bn euros which includes 3.6bn euros towards pension liabilities. The interest cost on term debt is 3.75% while it is much lower on thyssenkrupp liabilities

� JV currently has EBITDA run-rate of ~US$1.6bn and together with synergies benefits likely to generate ~US$2bn EBITDA by 2020

� Post servicing its debt, its own capex requirements and other charges, the JV is expected to generate significant free cash flows which would be largely distributed as dividends. Our calculations indicate dividend to be ~US$265mn implying payout of ~US$130mn for Tata Steel (See Exhibit 4 below)

� Deal expected to close FY19-end and to be accounted in books only after closure implying impact on Tata Steel from Q4FY19E only

� For Tata, overseas debt (given as Inter-company loans etc) of ~Rs170bn would be serviced by dividends received from the JV. The interest cost of this debt is ~4% implying finance cost of ~Rs7bn while the dividends receipt from JV for Tata is likely to be ~Rs9bn (See Exhibit 4 below).

8 Tata Steel

Exhibit 9: Tata Steel Thyssenkrupp JV – Key Financials

JV (US$ mn) Comments

Volume (MT) 21

EBITDA/t (US$) 80 US$90/t for thyssenkrupp & US$70/t for TSE

EBITDA 1,680

Synergies 248 Half of mid-point of guidance

EBITDA (incl. synergies) 1,928

Finance Costs 270

Depreciation 945

PBT 713

Tax - 30% 214

PAT 499

CFO 1,444

Capex 1,000

FCF 444

Dividend (@60% of FCF) 266 Assuming rest is retained for growth & debt repayments

Tata Steel's Share (@50%) 133 50% of overall dividend

Tata Steel Overseas residual debt (Rs bn) 170 Overseas debt at Singapore to be serviced through JV dividends

Interest Rate 4.00% Management guidance

Finance cost (Rs bn) 6.8

Dividend Inflow (Rs bn) 8.7


9 Tata Steel

Balance sheet remains in comfort zone despite aggressive acquisitions

Net Debt/EBITDA for residual operations (ex-Europe) remain comfortable despite two acquisitions

Our calculations for Net Debt/EBITDA for residual operations (excluding European operations which are getting transferred to JV) points towards the ratio being in comfortable territory of 3x. Despite factoring in the acquisitions of both Bhushan and Usha Martin, we estimate that Net Debt/EBITDA is expected to remain in a comfortable zone of 3.1x which allays street’s concerns on the balance sheet again getting stretched for Tata Steel. We believe that much larger asset base of Tata Steel’s own domestic business and its large cash flow in current steel cycle would help keep balance sheet in healthy position. The key risk to this ratio getting skewed would emerge from any large dip in steel prices and spreads which would supress the EBITDA while the net debt would remain intact.

Exhibit 10: Net Debt/EBITDA remains comfortable

FY18

Consolidated Debt 922

Net Cash 229

Net Debt 692

Less: Debt Transferred to European JV 170

Residual Debt for India & SEA Ops 522

EBITDA (India & SEA) 181

Net Debt/EBITDA 2.9

FY20E

Add: Bhushan Steel Acquisition Debt (incl. capex) 379

Add: Usha Martin Steel Acquisition Debt (incl. capex) 48

Net Debt Repayment over FY19-20 (post capex) 80

Net Debt for Domestic & SEA (post acquisitions) 869

FY20E EBITDA

Tata Steel Domestic (Jamshedpur + KPO) 199

South East Asia 21

Bhushan Steel 54

Usha Martin 6.4

Total EBITDA 280

Net Debt/EBITDA (x) 3.1


10 Tata Steel

Valuation – SOTP based fair value of Rs800/share

We value TSL on SOTP methodology and use EV/EBITDA methodology for valuing the individual businesses.

� Our SOTP valuation stands at ~Rs800/sh based on 6x EV/EBITDA (Refer Exhibit 10).

� JV valuation for proportionate Tata Steel share stands at ~Rs125bn or ~Rs104/sh

� Domestic & residual business valuation stands at Rs740/sh based on ~Rs15200/t EBITDA for domestic operations in FY20E

� Bhushan steel valuation of Rs(46)/share on total investment basis. We believe that positive contribution of BSL asset to Tata’s valuation would start only from FY21E

� Usha Martin steel valuation of Rs(8)/share on total investment basis. We believe that positive contribution of UML asset to Tata’s valuation would start only from FY21E

� Increase in multiple to 6.5x increases the fair value to ~Rs950/sh

� We have not assumed large debt reduction in our calculations on account of expected increase in capex for growth. We have also attributed overseas debt of ~Rs170bn to domestic & residual business for valuation purposes even though this debt is expected to be serviced by dividends from the JV. We believe that it is prudent to remain conservative on this front as we would wait for the JV dividend stream size to ascertain whether it can effectively service as well as repay the overseas debt of ~Rs170bn in the long run.

11 Tata Steel

Exhibit 11: SOTP Valuation for TSL

Domestic & other ops (Rs bn) FY20E Comments

Domestic Ops EBITDA 199 13 MT Volumes and ~Rs15200/t EBITDA

Others EBITDA 21 South East Asia + Subs

Total EBITDA 220

EV/EBITDA 6

EV 1,318

Debt 500 Net Debt residual as on FY18E end

Less: Repayments over FY19-20E 80 Annual reduction of Rs40bn assumed despite high EBITDA due to growth capex

Fair Value 898

No. of shares (mn) 1,203

Fair Value/sh 746

Europe JV Operations (US$ bn) FY20E

EBITDA 1.9 21 MT Volumes at ~US$80/t EBITDA plus US$200mn synergies

EV/EBITDA 6

EV 11.6

Debt 7.7 6.5bn euros debt transferred to the JV + 0.5bn euros of working capital debt assumed

Fair Value for JV 3.9

Fair Value for JV (Rs bn) 251 USD/INR = 65

Fair Value for Tata Steel @50% stake (Rs bn) 126 50% stake of Tata Steel in JV


Fair Value/sh 104

Bhushan Steel Acquisition FY20E

EBITDA 54 4.5 MT volumes and EBITDA/t of Rs12000/t

EV/EBITDA 6

EV 324

Acquisition Cost/Debt 352 Upfront settlement payment

Additional Capital Infusion 27 Working Capital & other capex

Fair Value for Bhushan Asset (55.0)


Fair Value/sh (46)

Usha Martin Acquisition FY20E

EBITDA 6.4 0.8 MT volumes and EBITDA/t of Rs8000/t

EV/EBITDA 6

EV 38

Acquisition Cost/Debt 45 Upfront settlement payment

Additional Capital Infusion 3 Working Capital & other capex

Fair Value (9.6)


Fair Value/sh (8)

SOTP Value 797


12 Tata Steel

Exhibit 12: Sensitivity Analysis (FY19E)

Sensitivity to key variables % change % impact on EBITDA % impact on EPS

Sales volume 1 0.7 1.4

Realization 1 1.2 2.3


Exhibit 13: Rolling forward EV/EBITDA chart

Source: Bloomberg, Company, Centrum Research Estimates

Exhibit 14: Comparative Valuations

Sector Mkt Cap (USD bn)

CAGR FY18-FY20E (%) EBITDA Margin (%) PE (x) EV/EBITDA (x) RoE (%) Div Yield (%)

Rev. EBITDA PAT FY18 FY19E FY20E FY18 FY19E FY20E FY18 FY19E FY20E FY18 FY19E FY20E FY18 FY19E FY20E

Tata Steel* 9.9 4.7 11.8 20.6 16.6 17.9 18.9 8.8 7.0 6.4 6.9 6.0 5.5 16.4 16.0 15.0 1.9 1.6 1.6

JSW Steel 13.6 5.1 14.6 12.5 20.6 23.9 24.5 9.4 11.9 12.1 6.8 7.3 7.5 24.9 26 21 1.3 1.3 1.2

POSCO 23.8 3.5 6.6 13.0 13.1 13.6 13.8 9.3 7.8 7.3 4.8 4.3 4.5 6.4 7.3 7.4 2.5 2.8 2.8

Nucor Corp 20.4 10.4 19.2 25.2 12.9 16.7 15.0 14.6 8.5 9.8 8.4 5.3 6.4 15.8 25.0 17.2 2.5 2.4 2.4

Thyssenkrupp AG 14.9 1.4 10.0 40.6 6.3 7.2 7.4 25.2 12.4 11.0 7.2 5.6 5.7 17.6 23.9 22.6 0.8 1.5 1.5

Source: Bloomberg consensus, *Centrum Research Estimates, NM-not meaningful

4.0

6.0

8.0

10.0

12.0

14.0

16.0

Sep-13 Mar-14 Sep-14 Mar-15 Sep-15 Mar-16 Sep-16 Mar-17 Sep-17 Mar-18 Sep-18

EV/EBITDA Mean Mean + Std Dev Mean - Std Dev

13 Tata Steel

Exhibit 15: Quarterly Financials (Cons)

Particulars (Rs mn) Q2FY17 Q3FY17 Q4FY17 Q1FY18 Q2FY18 Q3FY18 Q4FY18 Q1FY19

Net Sales 2,62,919 2,74,770 3,34,241 2,94,641 3,21,010 3,31,000 3,57,008 3,74,340

Other Operating Income 791 1,126 4,719 1,932 3,631 3,467 4,315 3,988

Total Income 2,63,710 2,75,896 3,38,960 2,96,573 3,24,641 3,34,466 3,61,323 3,78,328

Accretion to Stocks in trade & work in progress (9,995) (15,660) (2,953) (19,673) 13,084 1,480 4,672 (15,202)

Raw Material Consumed 77,172 80,113 99,576 1,02,794 1,03,546 1,02,016 1,03,698 1,25,302

Purchase of Semi/finished goods/traded goods 26,891 29,331 27,848 27,577 26,266 27,782 28,403 29,896

Employee Expenses 45,183 41,792 42,169 43,039 42,941 44,256 45,827 49,333

Other Exp 94759 1,03,958 1,02,067 93,096 91,598 1,01,962 1,13,735 1,24,323

Operating Profit (Core EBITDA) 29,700 36,362 70,252 49,740 47,207 56,969 64,989 64,677

Depreciation 14,677 13,790 15,892 15,011 14,733 14,751 15,122 18,056

EBIT 15,023 22,572 54,360 34,729 32,474 42,219 49,867 46,620

Interest 13,511 13,874 12,631 13,437 13,499 13,273 14,809 16,701

Other Revenue/Income 1,084 1,301 1,522 1,555 2,532 2,259 2,749 3,473

Other Excep. Items (restructuring, asset sales etc) (593) (286) (40,686) (6,168) (447) (11,156) 1,13,761 (3,436)

Profit Before Tax 2,004 9,713 2,565 16,679 21,060 20,049 1,51,569 29,956

Tax 3,634 6,984 9,760 7,405 11,380 9,508 5,761 11,037

Tax rate (%) 181.3 71.9 380.6 44.4 54.0 47.4 3.8 36.8

Profit After Tax (1,630) 2,729 (7,195) 9,273 9,680 10,541 1,45,808 18,919

Less: Minority interest in income - - - - - - - -

Add/(Less) - Share in the profit/(loss) of associates (91) (3) 28 59 198 898 586 448

Profit/(loss) from discontinued ops 1,227 (408) (4,513) (121) 299 (80) 486 (30)

PAT attributable to Consolidated Group (494) 2,319 (11,680) 9,211 10,178 11,359 1,46,880 19,338

Adjusted PAT for the group (1,127) 3,012 33,518 15,500 10,325 22,595 32,633 22,803

Growth (%)

Net Sales (9.6) (1.2) 29.6 17.1 22.1 20.5 6.8 27.0

EBITDA 62.3 368.8 212.8 53.4 58.9 56.7 (7.5) 30.0

Adj. PAT (105.4) NM NM 355.9 NM 650.1 (2.6) 47.1

Margin (%)

EBITDA 11.3 13.2 20.7 16.8 14.5 17.0 18.0 17.1

EBIT 5.7 8.2 16.0 11.7 10.0 12.6 13.8 12.3

PAT (reported bef minority interest) (0.6) 1.0 (2.1) 3.1 3.0 3.2 40.4 5.0

Key Drivers

Volumes (MT)

Indian operations 2.6 3.0 3.2 2.8 3.1 3.3 3.0 3.0

Europe 2.3 2.4 2.9 2.4 2.6 2.4 2.6 2.5

South-East Asia 0.7 0.7 0.7 0.6 0.7 0.6 0.6 0.6

EBITDA/tonne (US$)

Indian operations (Rs/t) 7,308 11,285 13,594 10,786 10,959 14,025 15,872 17,077

Europe 67 45 103 81 45 40 70 101

South-East Asia 16 29 33 6 31 46 25 27


Exhibit 16: Key Performance Indicators

Assumptions FY16 FY17 FY18 FY19E FY20E

Volumes (MT)

Indian operations 9.5 11.0 12.2 12.4 13.0

Europe 13.6 10.1 10.0 10.0 10.0

South-East Asia 2.7 2.6 2.5 2.8 2.8

EBITDA/tonne (US$/t)

Indian operations (Rs/t) 7,979 10,828 12,976 15,646 15,300

Europe (7) 70 59 75 80

South-East Asia 13 30 27 25 30

Realizations/tonne (US$/t)

Indian operations (Rs/t) 39,688 43,123 47,775 51,822 50,929

Europe 756 774 931 1,005 980

South-East Asia 442 475 595 675 650


14 Tata Steel

Financials (Cons)*

Exhibit 17: Income Statement

Y/E March (Rs mn) FY16 FY17 FY18 FY19E FY20E

Revenues 10,19,647 11,22,994 13,17,003 14,70,287 14,43,816

Materials cost 4,06,215 3,93,049 5,21,646 6,02,317 5,52,762

% of revenues 39.8 35.0 39.6 41.0 38.3

Employee cost 1,75,876 1,72,522 1,76,062 1,85,586 1,88,657

% of revenues 17.2 15.4 13.4 12.6 13.1

Others 3,57,873 3,87,345 4,00,390 4,19,036 4,28,952

% of revenues 35.1 34.5 30.4 28.5 29.7

EBITDA 79,683 1,70,078 2,18,905 2,63,348 2,73,446

EBITDA margin (%) 7.8 15.1 16.6 17.9 18.9

Depreciation & Amortisation 53,064 56,729 59,617 65,712 71,202

EBIT 26,620 1,13,349 1,59,289 1,97,637 2,02,244

Interest expenses 42,214 50,722 55,018 55,059 49,389

PBT from operations (15,594) 62,627 1,04,271 1,42,578 1,52,855

Other income 4,122 5,275 9,095 9,549 10,027

Exceptional items 39,904 (43,242) 95,991 - -

PBT 28,432 24,660 2,09,357 1,52,127 1,62,882

Taxes 6,900 27,780 34,054 46,233 47,055

Effective tax rate (%) 24 113 16 30 29

PAT 21,532 (3,120) 1,75,303 1,05,894 1,15,827

Minority/Associates (1,104) 77 1,741 1,915 2,107

Extraordinary Items (25,399) (38,642) - - -

Reported PAT 20,428 (41,686) 1,77,044 1,07,809 1,17,933

Adjusted PAT 5,923 40,198 81,052 1,07,809 1,17,932


Exhibit 18: Key Ratios

Y/E March FY16 FY17 FY18 FY19E FY20E

Growth Ratio (%)

Revenue (26.9) 10.1 17.3 11.6 (1.8)

EBITDA (36.4) 113.4 28.7 20.3 3.8

Adjusted PAT NM 578.7 101.6 33.0 9.4

Margin Ratios (%) EBITDA 7.8 15.1 16.6 17.9 18.9

PBT from operations (1.5) 5.6 7.9 9.7 10.6

Adjusted PAT 0.6 3.6 6.2 7.3 8.2

Return Ratios (%)

ROE 1.3 9.9 16.4 16.0 15.0 ROCE 1.7 6.7 8.6 9.4 9.5

ROIC 1.5 6.4 8.1 9.0 9.1

Turnover Ratios (days)

Gross block turnover ratio (x) 0.9 0.9 1.0 1.0 0.9

Debtors 43 38 34 35 35 Inventory 72 81 79 75 75 Creditors 66 60 57 55 55

Cash conversion cycle 48 58 56 55 55

Solvency Ratio (x)

Net debt-equity 1.9 2.2 1.5 1.1 0.9

Debt-equity 1.9 2.2 1.5 1.1 0.9 Interest coverage ratio 1.6 0.4 0.3 0.3 0.2 Gross debt/EBITDA 10.3 4.9 4.2 3.1 2.7

Current Ratio 1.0 1.0 1.2 1.2 1.2

Per share Ratios (Rs)

Adjusted EPS 6.1 41.4 70.8 89.6 98.0

BVPS 450.9 389.8 531.6 614.1 690.4

CEPS 75.8 15.5 206.7 144.2 157.2 DPS 8.0 10.0 10.0 10.0 10.0 Dividend payout % 38.0 (23.3) 6.5 11.2 10.2

Valuation (x)*Avg Mkt Cap

P/E (adjusted) 44.5 9.5 8.8 7.0 6.4

P/BV 0.6 1.0 1.2 1.0 0.9

EV/EBITDA 13.6 7.1 6.9 6.0 5.5

Dividend yield % 2.9 2.5 1.9 1.6 1.6

5 Yr Avg AOCF/EV yield % 7.5 6.4 4.1 5.0 6.8

Source: Company, Centrum Research Estimates, NM – not meaningful *Above financials do not integrate Bhushan Steel and Usha martin numbers

Exhibit 19: Balance Sheet


Equity Share Capital 9,702 9,702 11,450 12,031 12,031

Reserves & surplus 4,27,623 3,68,491 5,97,257 7,26,778 8,18,603

Shareholders' fund 4,37,326 3,78,193 6,08,706 7,38,810 8,30,635

Total Debt 8,17,604 8,27,959 9,18,948 8,28,948 7,38,948

Def tax liab. (net) 87,934 91,442 95,341 95,341 95,341

Minority interest 7,809 16,017 9,365 9,365 9,365

Total Liabilities 13,50,673 13,13,611 16,32,360 16,72,463 16,74,288

Gross Block 11,28,498 13,03,262 14,44,804 15,66,804 16,88,804

Less: Acc. Depreciation 4,04,473 3,80,498 4,79,209 5,44,921 6,16,122

Net Block 7,24,025 9,22,763 9,65,595 10,21,883 10,72,681

Capital WIP 3,57,933 1,55,144 1,61,598 1,29,598 97,598

Net Fixed Assets 10,81,959 10,77,907 11,27,193 11,51,481 11,70,279

Investments 1,07,137 1,24,571 1,78,995 1,78,995 1,78,995

Inventories 2,00,133 2,48,038 2,83,310 3,02,114 2,96,675

Sundry debtors 1,20,662 1,15,868 1,24,155 1,40,986 1,38,448

Cash 61,863 49,211 79,379 96,268 83,719

Loans & Advances 6,197 5,976 9,738 12,085 11,867

Other assets 1,90,889 1,02,903 2,84,451 3,02,114 2,96,675

Total Current Asset 5,79,744 5,21,996 7,81,034 8,53,567 8,27,383

Trade payables 1,85,567 1,85,745 2,04,138 2,21,550 2,17,561

Other current Liab. 1,72,977 1,72,448 1,94,645 2,37,663 2,33,384

Provisions 59,623 52,671 56,079 52,366 51,424

Net Current Assets 1,61,577 1,11,133 3,26,172 3,41,987 3,25,014

Total Assets 13,50,673 13,13,611 16,32,360 16,72,463 16,74,288


Exhibit 20: Cash Flow


Operating profit before WC 68,240 1,75,814 2,01,871 2,65,264 2,75,552

Changes in working capital 56,179 (82,432) (15,954) (18,803) 5,439

Cash flow from operations 1,14,554 1,08,481 80,234 2,22,451 2,32,703

Adj. OCF (OCF - Interest) 72,339 57,759 25,216 1,67,392 1,83,315

Net Capex 1,03,941 80,044 76,576 90,000 90,000

Adj. FCF (31,601) (22,285) (51,360) 77,392 93,315

Cash flow from investments (92,538) (90,862) (1,20,256) (82,797) (79,756)

Cash flow from financing (47,291) (25,924) 66,399 (1,22,764) (1,65,497)

Cash flow from investments (25,276) (8,306) 26,377 16,889 (12,549)


15 Tata Steel

Appendix A

Disclaimer

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16 Tata Steel

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Tata Steel price chart

Source: Bloomberg

0

200

400

600

800

Sep-15 Mar-16 Sep-16 Mar-17 Sep-17 Mar-18 Sep-18

TATA IN EQUITY

17 Tata Steel

Disclosure of Interest Statement

1 Business activities of Centrum Broking Limited (CBL)

Centrum Broking Limited (hereinafter referred to as “CBL”) is a registered member of NSE (Cash, F&O and Currency Derivatives

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3 Registration status of CBL: CBL is registered with SEBI as a Research Analyst (SEBI Registration No. INH000001469)

Tata Steel JSW Steel

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the end of the month immediately preceding the date of publication of the document.

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from the subject company in the past twelve months;

No No

13 Whether it or its associates have received any compensation for products or services other than investment banking or merchant

banking or brokerage services from the subject company in the past twelve months;

No No

Rating Criteria

Rating Market cap < Rs20bn Market cap > Rs20bn but < 100bn Market cap > Rs100bn

Buy Upside > 20% Upside > 15% Upside > 10%

Hold Upside between -20% to +20% Upside between -15% to +15% Upside between -10% to +10%

Sell Downside > 20% Downside > 15% Downside > 10%

Member (NSE and BSE)

Regn No.:

CAPITAL MARKET SEBI REGN. NO.: BSE: INB011454239 CAPITAL MARKET SEBI REGN. NO.: NSE: INB231454233 DERIVATIVES SEBI REGN. NO.: NSE: INF231454233

(TRADING & CLEARING MEMBER) CURRENCY DERIVATIVES: MCX-SX INE261454230

CURRENCY DERIVATIVES:NSE (TM & SCM) – NSE 231454233

Depository Participant (DP) CDSL DP ID: 120 – 12200

SEBI REGD NO. : CDSL : IN-DP-CDSL-661-2012

PORTFOLIO MANAGER

SEBI REGN NO.: INP000004383

Research Analyst SEBI Registration No. INH000001469

Mutual Fund Distributor

AMFI REGN No. ARN- 147569

Website: www.centrum.co.in Investor Grievance Email ID: [email protected]

Compliance Officer Details:

Ashok D Kadambi (022) 4215 9937; Email ID: [email protected]

Centrum Broking Ltd. (CIN :U67120MH1994PLC078125)

Registered Office Address

Bombay Mutual Building , 2nd Floor, Dr. D. N. Road, Fort, Mumbai - 400 001

Corporate Office & Correspondence Address

Centrum House 6th Floor, CST Road, Near Vidya Nagari Marg, Kalina, Santacruz (E), Mumbai 400 098.

Tel: (022) 4215 9000 Fax: +91 22 4215 9344

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