Tata Steel has appreciated 42 per cent from its 52-week low on January 2. Analysts see improving fundamentals, both in domestic and European operations, driving the stock further up. The company’s 2.9-million tonnes per annum (mtpa) expansion at Jamshedpur (Jharkhand) will start commercial operations by the end of this month, pushing up volumes gradually. Its domestic operations are on a strong footing, with captive raw material supplies and balanced product mix accruing further benefits. Price and demand for long products (45 per cent of Tata Steel India’s portfolio) remain much more stable, compared to flat steel products that may come under pressure. On the other hand, Tata Steel Europe (TSE) is also likely to see a gradual improvement in its profitability, led by lower raw material costs and better prices. Against this backdrop, analysts expect the stock to do well. According to Bloomberg data, 65 per cent analysts have ‘buy’, while 22 per cent have ‘hold’ rating on the stock.
India biz on a strong footing
Tata Steel’s domestic business has higher raw material integration and is the most efficient player in the country. The superior product mix adds to its strength, enabling it to earn better margins. Domestic long product prices of moving up $30-40 a tonne sequentially in the March quarter, will only add to its gains.
Though apprehensions are being raised over the sustenance of steel prices in the domestic market, concerns are directed more towards flat steel products (used by auto and consumer goods markers). Long products (used by the construction and infrastructure segments) had seen an increase in prices, as demand improved and unorganised players suffered due to iron ore supply crunch and higher thermal coal costs.
| PROFIT BOOST IN FY13 | ||||
| In Rs crore | FY11 | 9MFY12 | FY12E | FY13E |
| Revenue | 117,149 | 98,397 | 133,776 | 134,226 |
| % change | 15.1 | 17.5 | 14.2 | 0.3 |
| Ebitda | 14,392 | 8,386 | 12,556 | 16,567 |
| Ebitda (%) | 12.3 | 8.5 | 9.4 | 12.3 |
| Net profits | 8,982 | 4,956 | 5,765 | 6,627 |
| % change | LTP | 3.1 | -35.8 | 15.0 |
| EPS (Rs) | 99.0 | 50.4 | 60.1 | 69.1 |
| PE (x) | 4.8 | 8.0 | 6.9 | |
| Source- CapitaLine, Bloomberg, Analyst reports E-Estimates LTP- Loss to Profit | ||||
Chirag Shah and Faisal Memon of Barclays Capital observe supply constraints in the long-product segment are likely to persist because small sponge-based producers will continue to face severe margin crunch. Utilisation levels of several sponge iron players are hovering at 20-50 per cent. They believe this is providing large steel companies with a window of opportunity to corner market share. Flat products, on the other hand, saw two price hikes in the last two months, with the second due to customs duty hike to 7.5 per cent, from five per cent. Analysts feel companies are actually offering discounts on flat products, and hence, they are less confident on price hikes being sustainable.
Abhijeet Naik and Nitij Mangal, analysts at CLSA, too, feel prices of long products will remain strong in 2012-13, given the favourable demand-supply dynamics, but prices of flat products will come under some pressure, as India becomes a net exporter of flats by 2013-14. Bhaskar N Basu, analyst at Bank of America Merrill Lynch, says long products’ demand and supply are balanced and capacity increase is skewed towards flats (75 per cent of capacity increase).
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However, analysts say demand for longs may slow down slightly before the monsoon due to a slowdown in re-stocking activity. Most analysts believe the medium-term pricing outlook for the prices of long products remains favourable. Analysts at Barclays Capital say companies focused on the long-product segment like Tata Steel (contribution of 45 per cent from longs) remain their top picks.
Meanwhile, for the March quarter, Emkay Global expects Tata Steel to clock a domestic sales volume of 1.69 mt and a standalone profit of Rs 1,600 crore, led by an improvement in earnings before interest, taxes, depreciation, and amortisation (Ebitda) per tonne (to $336) on higher realisations.
Boost from Jamshedpur expansion
The 2.9-mtpa expansion at the Jamshedpur steel plant, expected to be commissioned this month, will require some time to stabilise with full benefits seen during the second half of 2012-13. CLSA’s analysts expect volumes to grow at a compounded annual growth rate (CAGR) of 17 per cent during FY12-14, led by this expansion. Tarang Bhanushali, analyst at IIFL, expects the new capacity to contribute one mt more saleable steel each over the next two years. On average stable steel prices, a superior product mix, coupled with lower coking coal prices, would lead to higher Ebitda per tonne in 2012-13. Standalone operations are, thus, expected to witness a CAGR of 20.6 per cent in Ebitda over FY12-14. He says an operating cash flow of Rs 16,200 crore generated over the same period will help fund major part of the capex for its Orissa project.
TSE also sees recovery
Spot steel prices in Europe have risen by $70-80 a tonne since January. While concerns may still be there on the sustenance of these prices, TSE’s realisations will get some boost in the near term. TSE, which depends on external iron ore and coal procurement, will also benefit from the correction in raw material prices. Analysts at IIFL expect realisations to increase by $25 a tonne sequentially in the March quarter. This, along with a decline in raw material costs, should help TSE post a positive Ebitda in the March quarter, with full gains reflecting from the June quarter, given the nature of its contracts. Analysts at CLSA expect the trend to sustain in the second quarter, too. This should help improve the overall 2012-13 profitability; they are assuming an Ebitda per tonne of $25 in 2012-13. On the back of various restructuring processes, revival in European demand and higher steel prices, analysts at IIFL expect this to increase to $50 a tonne in 2013-14.