 "Tata Steel: re-rating on the cards")
After its June quarter results, analysts have turned positive on Tata Steel. This is also reflected in share prices which are up about 6% and currently trading at Rs 255.4 a share. Analysts believes that the Street was overly concerned about prospects of the company and lot of negative news was already built in its share price. Tata Steel was one of the biggest underperformers in Sensex, it share price since January 2013 has fallen almost 45%.
"Overall we found the results encouraging and management commentary balanced. We expect upgrades to earnings estimates elsewhere on the Street. We continue to see Tata Steel as potentially a solid beneficiary from its ongoing restructuring," said Vipul Prasad of Morgan Stanley in a note.
In terms of valuation, stock is trading 10 times its estimated earnings and 1 time its book value in FY14. Since there is possibility of earnings upgrades most analysts have buy rating on the stock.
Change in prospects
During first quarter of FY14 due to higher volumes in India business and better realisations in the Europe, the company reported strong performance on a consolidated basis.
In June quarter, the company reported 3% decline in sales to Rs 32,804.79 crore. However, despite that, net profit witnessed a 91% spurt on account of 5% gain in operating profit compared to a year ago quarter. The biggest contribution has come from the European business, which despite lower volumes by 2.18% to 3.14 million tonne, reported 100 basis point improvement in the margins.
EBIDTA per tonne at European business came to Rs 2,473 in June quarter as compared to Rs 1,947 per tonne last year. Because of this, contribution of Europe in consolidated operating profits went up by 300 basis points. Better cost management, sale of value added products and efficiency gain in European business has led to new optimism.
"Q1 EBITDA per tonne at the European operations was Rs 2,475 per tonne (38% up on QoQ basis and 29% up on YOY basis) compared our estimate of Rs 935 per tonne. Management commented that the new Port Talbot Blast Furnace No 4 refurbished, Blast Furnace No 7 in Ijmuiden & other efficiency improvement initiatives are showing positive results and this is likely to recur," said Sandip Bansal of UBS Securities in a note.
Outlook
The challenges both in the domestic and international market remains. Particularly in the domestic market, weakness in both the automobile and construction industries will be key to watch. That apart, from September its long product facility will go for a 60 day planned shutdown. In Europe too the demand outlook to remain subdued for the next few months. This is also a reason that management is looking to focus on internal improvements rather than external environment which remains challenging. Thankfully the domestic business should be able to compensate because of stable prices and higher volumes in the coming months.
"Overall we found the results encouraging and management commentary balanced. We expect upgrades to earnings estimates elsewhere on the Street. We continue to see Tata Steel as potentially a solid beneficiary from its ongoing restructuring," said Vipul Prasad of Morgan Stanley in a note.
In terms of valuation, stock is trading 10 times its estimated earnings and 1 time its book value in FY14. Since there is possibility of earnings upgrades most analysts have buy rating on the stock.
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"We increase our EPS estimates by 27%, 13% respectively for FY14 and FY15 (primarily on a lower tax rate), and our EBITDA estimates by 3 and 4%. Thus our June 2014 price target rises to Rs 500 a share," said Pinakin Parekh who is tracking the company at J P Morgan in a note.
Change in prospects
During first quarter of FY14 due to higher volumes in India business and better realisations in the Europe, the company reported strong performance on a consolidated basis.
In June quarter, the company reported 3% decline in sales to Rs 32,804.79 crore. However, despite that, net profit witnessed a 91% spurt on account of 5% gain in operating profit compared to a year ago quarter. The biggest contribution has come from the European business, which despite lower volumes by 2.18% to 3.14 million tonne, reported 100 basis point improvement in the margins.
EBIDTA per tonne at European business came to Rs 2,473 in June quarter as compared to Rs 1,947 per tonne last year. Because of this, contribution of Europe in consolidated operating profits went up by 300 basis points. Better cost management, sale of value added products and efficiency gain in European business has led to new optimism.
"Q1 EBITDA per tonne at the European operations was Rs 2,475 per tonne (38% up on QoQ basis and 29% up on YOY basis) compared our estimate of Rs 935 per tonne. Management commented that the new Port Talbot Blast Furnace No 4 refurbished, Blast Furnace No 7 in Ijmuiden & other efficiency improvement initiatives are showing positive results and this is likely to recur," said Sandip Bansal of UBS Securities in a note.
Outlook
The challenges both in the domestic and international market remains. Particularly in the domestic market, weakness in both the automobile and construction industries will be key to watch. That apart, from September its long product facility will go for a 60 day planned shutdown. In Europe too the demand outlook to remain subdued for the next few months. This is also a reason that management is looking to focus on internal improvements rather than external environment which remains challenging. Thankfully the domestic business should be able to compensate because of stable prices and higher volumes in the coming months.