3QFY2010 Result Update I Steel

February 17, 2010

Tata Steel BUY

CMP Rs585
Performance Highlights Target Price Rs697
Investment Period 15 Months
Tata Steel’s consolidated 3QFY2010 net income came in at Rs472.7cr,
compared to a loss of Rs2,707cr in 2QFY2010, and was down 41.9% yoy.
Stock Info
While the top-line grew by 3.2% qoq to Rs26,202cr, the EBITDA margin
increased by 980bp qoq to 11.3%. This was mainly on the back of a recovery Sector Steel
in its European operations, where the company reported an EBITDA/tonne of
Market Cap (Rs cr) 51,865
US $37 as compared to a loss of US $96 in the last quarter. With a sequential
improvement expected in its European operations, driven by higher steel Beta 1.4
deliveries and higher prices, along with the benefits of lower coking coal cost,
we maintain a Buy on the stock. 52 WK High / Low 662/149

Avg. Daily Volume 3540294

EBITDA improvement trend at Tata Steel Europe (TSE) continues: 3QFY2010
net revenue increased by 3.2% qoq to Rs26,202cr. The sales volume grew by Face Value (Rs) 10
3.7% yoy and was almost flat on a qoq basis, at 6.3mn tonnes. EBITDA/tonne BSE Sensex 16,429
at it its European operations increased to US $37/tonne as compared to a
loss of US $96/tonne in the last quarter. Consequently, the EBITDA margin Nifty 4,914
expanded by 980bp qoq to 11.3%. The interest expense for the quarter was
Reuters Code TISC.BO
down by 16.3% yoy to Rs763cr, due to pre-payment of debt. The steep
increase in other income from Rs31.6cr in 3QFY2009 to Rs409.9cr in Bloomberg Code TATA @IN
3QFY2010 was mainly on account of the sale of investments. The effective tax
Shareholding Pattern (%)
rate for the company was at 65.3%, due to higher taxes across geographies,
where the company’s operations were making profits. Due to the above Promoters 31.3
reasons, the net income was down by 41.9% yoy to Rs472.7cr. Adjusting for
the exceptional items, the adjusted net income stood at Rs668.4cr as MF/Banks/Indian FIs 28.2
compared to a loss of Rs1,796cr in 2QFY2010. FII/NRIs/OCBs 19.7

Outlook and Valuation: At the CMP of Rs585, the stock is trading at 7.1x Indian Public 20.8
FY2011E and 6.3x FY2012E EV/EBITDA. We expect a sequential improvement Abs. (%) 3m 1yr 3yr
in 4QFY2010E in its European operations, driven by higher steel deliveries
and higher prices, along with the benefits of lower coking coal costs. We Sensex (3.6) 81.8 14.4
maintain a Buy on the stock, with a Target Price of Rs697 (based on SOTP
valuation). Tata Steel 8.7 240.8 49.7

Key Financials (Consolidated)

Y/E March (Rs cr) FY2009 FY2010E FY2011E FY2012E
Net Sales 145,686 100,515 117,540 123,012
% chg 11.1 (31.0) 16.9 4.7
Net Profit 4,951 (390) 5,425 5,096
% chg (59.9) - - (6.1)
EPS (Rs) 59.0 (4.4) 61.2 57.5
OPM(%) 11.3 6.0 12.1 12.4
P/E (x) 9.9 - 9.6 10.2 Paresh Jain
P/BV (x) 1.8 1.8 1.5 1.4 Tel: 022 – 4040 3800 Ext: 348
RoE (%) 16.0 - 17.0 14.1 E-mail: pareshn.jain@angeltrade.com
RoCE (%) 15.4 2.8 11.6 11.5
Pooja Jain
EV/Sales (x) 0.7 1.0 0.9 0.4
Tel: 022 – 4040 3800 Ext: 311
EV/EBITDA (x) 6.2 16.7 7.1 6.3 E-mail: pooja.j@angeltrade.com
Source: Company, Angel Research

1
Please refer to important disclosures at the end of this report Sebi Registration No: INB 010996539
 Tata Steel I 3QFY2010 Result Update

Exhibit 1: 3QFY2010 Consolidated Performance

(Rs cr) 3QFY10 3QFY09 % chg 9MFY10 9MFY09 % chg
Net Sales 26,202 33,191 (21.1) 74,889 120,898 (38.1)
- Consumption of Raw
10,482.8 18,351.4 (42.9) 34,226.8 59,734.0 (42.7)
Material
(% of Net Sales) 40.0 55.3 45.7 49.4
- Power& Fuel 1,084.5 1,442.9 (24.8) 3,063.6 4,827.7 (36.5)
(% of Net Sales) 4.1 4.3 4.1 4.0
- Staff Costs 4,199.9 4,457.9 (5.8) 12,523.2 14,113.6 (11.3)
(% of Net Sales) 16.0 13.4 16.7 11.7
Freight & Handling 1,445.1 1,389.3 4.0 4,059.4 4,720.5 (14.0)
(% of Net Sales) 5.5 4.2 5.4 3.9
- Other expenses 6,039.3 4,692.2 28.7 17,723.8 19,407.9 (8.7)
(% of Net Sales) 23.0 14.1 23.7 16.1

Total Expenditure 23,251 30,334 (23.3) 71,597 102,804 (30.4)

Operating Profits 2,950.6 2,857.4 3.3 3,292.5 18,094.6 (81.8)

OPM (%) 11.3 8.6 4.4 15.0
Interest 763.0 911.4 (16.3) 2,362.1 2,556.5 (7.6)
Depreciation 1,154.7 1,085.2 6.4 3,397.2 3,337.1 1.8
Other Income 409.9 31.6 1,198.0 631.8 168.6 274.6
Exceptional Items (195.7) (200.7) (1,325.8) (900.3)
Profit before Tax 1,247.1 691.7 80.3 (3,160.8) 11,469.3
(% of Net Sales) 4.8 2.1 (4.2) 9.5
Tax 814.8 (40.5) 1,365.2 2,118.8 (35.6)
(% of PBT) 65.3 (5.9) (43.2) 18.5
Profit after Tax 432.3 732.2 (41.0) (4,526.1) 9,350.5
Reported PAT after
472.7 813.9 (41.9) (4,443.3) 9,486.4
Minority Interest
Source: Company, Angel Research

February 17, 2010 2

 Tata Steel I 3QFY2010 Result Update

Key Result Highlights and Analyst Meet Takeaways

• The management indicated that they do not expect steel demand in Europe to
reach the 2007 levels in next 4-5 years. The construction activity in Europe is
currently weak and is in a recovery mode. The management indicated that
prices will remain firm on the back of rising raw material prices. Recently, Tata
Steel Europe (TSE) has undertaken price hikes of 10-15% in Europe, effective
from March, 2010, and will be reviewing further price hikes depending on the
market conditions.

• Mothballing of the Teeside Cast Plant (TCP) is expected to be completed by the

end of February, 2010. However, the coke oven plants at TCP will continue to be
operational. The partial mothballing will result in the loss of about 1,600 jobs.
The company had to take this decision in order to reduce losses, after four
international customers prematurely terminated a 10-year off take agreement in
April, 2009. The TCP incurred an EBIT loss of US $222mn from April-
September, 2009. After the mothballing of TCP, the liquid steel capacity of TSE
is expected to be 17mn tonnes.

• The capacity utilisation at TSE in 3QFY2010 was ~80%, and the management
expects to operate at the same rate in 4QFY2010E without TCP. However, the
management is cautious on the outlook and does not foresee 100% capacity
utilisation in the near-term. Due to the improved market situation in Thailand,
the capacity utilisation of Tata Steel Thailand (TSTH) was in the range of 75-
80%.

• Production in 4QFY2010 is expected to be lower as compared to that in

3QFY2010, due to the mothballing of the TCP and a 4-week shutdown at Blast
furnace No 7 Ijmuiden, due to repair work.

• The Sales volume grew by 3.7% yoy and was almost flat on a qoq basis, at
6.3mn tonnes. Sales deliveries in Europe fell by 12% yoy and 3% qoq to 3.8mn
tonnes. Natsteel reported a substantial jump of 50% in sales volume to 0.6mn
tonnes, while the deliveries at the Thailand operations were flat at 0.3mn
tonnes. The management indicated that 4QFY2010 deliveries will be higher
than 3QFY2010 deliveries, and reiterated its volume guidance for domestic
operations to be 6.2mn tonnes for FY2010E.

Exhibit 2: Sales Volume (tonnes)

3QFY10 3QFY09 % yoy 2QFY10 % qoq

Finished Steel Sales 6,300,000 6,070,000 3.8 6,356,000 (0.9)

India 1,600,000 1,070,000 49.5 1,456,000 9.9

UK 3,800,000 4,300,000 (11.6) 3,900,000 (2.6)

Natsteel 600,000 400,000 50.0 700,000 (14.3)

TSTH 300,000 300,000 0.0 300,000 0.0

Source: Company, Angel Research

February 17, 2010 3

 Tata Steel I 3QFY2010 Result Update

• Most of TSE’s contracts are on a monthly basis, while approximately 15% of the
total order book consists of long-term pricing contracts. The management has
indicated that most of the long-term contracts have been rolled over in
September, 2009 at higher prices.

Exhibit 3: Average realisations

(US $/tonne) 3QFY10 3QFY09 % yoy 2QFY10 % qoq

India 856 926 (7.5) 813 5.4

UK 948 1,251 (24.3) 894 6.0

Natsteel 585 858 (31.8) 530 10.4

TSTH 570 423 34.6 567 0.6

Source: Company, Angel Research

• The operating cost at TSE declined by US $500mn qoq. The company follows a
June-July cycle for raw material pricing contracts. The benefit of low cost coking
coal is expected to last till 1HCY2010E.

• The management expects the employee strength to be reduced to 35,000

employees by March, 2010E. The reduction of 7,000 employees includes
~1,600 employees from TCP. The restructuring charges and the redundancy
cost therein are expected to continue till May-June, 2010.

• 3QFY2010 EBITDA includes a small loss at TCP. EBITDA/tonne in Thailand was

lower on a sequential basis, as the difference between scrap and billets
narrowed.

Exhibit 4: EBITDA/tonne
(US $/tonne) 3QFY10 3QFY09 % yoy 2QFY10 % qoq
India 325 286 13.6 285 14.0
UK 37 83 (55.1) (96) -
Natsteel 25 (40) - 29 (12.5)
TSTH 27 (253) - 57 (52.9)
Source: Company; Angel Research

• Cash and Cash equivalents as on December, 2009 stood at

US $1,849mn, and the undrawn lines of credit were at US $ 1,005mn.

• Gross debt as on December, 2009 was US $12,929mn. The company also has
forward covers translating into a forex gain of US $576mn. The underlying net
debt position stands at US $10,370mn.

• Pension Surplus at TSE as on December, 2009 stood at US $534mn. The asset-

mix of the pension funds has remained at the same level of September, 2009
(64% invested in Bonds, 30% invested in Equities, 4% in Real Estate, and the
balance is held in cash).

February 17, 2010 4

 Tata Steel I 3QFY2010 Result Update

Outlook and Valuation

At the CMP of Rs585, the stock is trading at 7.1x FY2011E and 6.3x FY2012E
EV/EBITDA. We expect a sequential improvement in 4QFY2010E in its European
operations, driven by higher steel deliveries and higher prices, along with the
benefits of lower coking coal costs. We maintain a Buy on the stock, with a Target
Price of Rs697 (based on SOTP valuation).

Exhibit 5: SOTP Valuation

FY12 EBIDTA EV/EBIDTA EV
Tata Steel 9,764 7.5 73,228
TSE 4,378 7.0 30,649
Asia 1,139 6.0 6,833
Total EV 110,710
Net Debt 48,932
Market Cap 61,778
Target Price 697
Source: Angel Research

Key risks to our call: 1) a further delay in expansion projects, 2) government

intervention to curtail steel price increases, and 3) a slowdown in the outlook of
economic activity.

February 17, 2010 5

 Tata Steel I 3QFY2010 Result Update

Research Team Tel: 022-4040 3800 E-mail: research@angeltrade.com Website: ww.angeltrade.com

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Disclosure of Interest Statement Tata Steel

1. Analyst ownership of the stock No
2. Angel and its Group companies ownership of the stock No
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February 17, 2010 6