Tata Steel Company Update Dec 07 Edel

India Equity Research | Metals & Mining Tata Steel

Company Update

TATA STEEL

INR 935

BUY

Big is beautiful

A closer look at Tata Steel’s position as the world’s sixth-largest steel player reveals some key insights: ♦

December 31, 2007

Apart from Arcelor Mittal, Tata Steel is the only globally leading player, with strong presence in

both

Asia

and

Europe.

This

unique

position

gives

it

the

benefits

of:

(i) scale and premium positioning (due to its European operations); and (ii) strong margins and volume-based growth (due to its Asian operations). ♦

Tata Steel is among the top 10 global players in both flats and longs, unlike many other leading players (such as POSCO, US Steel, and Thyssen), who are present in only one of the two segments. This balanced presence derisks Tata Steel’s business significantly and enables it to benefit from the general steel upcycle that we are witnessing currently.

Prasad Baji +91-22-2286 4248 [email protected] Amit Dixit +91-22-4019 4755 [email protected] Vinay Chokhra +91-22-2286 4280 [email protected]

Truly, big can also be beautiful. We are positive about the following multi-pronged strategy that Tata Steel is adopting and believe it is the foundation to sustainable success: ♦

Aggressively scale capacity in Asia, the growth engine for global steel. Current steel making capacity of ~8mtpa in Asia is expected to reach ~37mtpa by CY15E.

♦

Maintain Corus’s market leading presence in premium products.

♦

Improve raw material security. The recent strategic investments in Mozambique (coal) and Ivory Coast (iron ore) are initiatives in this direction.

Reuters

:

TISC.BO

Bloomberg

:

TATA IN

:

1,049 / 399 730.7

Outlook and valuations: Strong, visible earnings growth; maintain ‘BUY’ Corus’s EBITDA margins have improved from 6.9% in CY06 to an estimated 10.5% currently

Market Data

led by strong European steel prices which have surprised on the upside. Overall, going

52-week range (INR)

forward, we are confident of the current EBITDA margins being maintained at Corus led by

Share in issue (mn)

:

expected price increases, increase in capacity utilization (up from 88% in FY07 to 96% in

M cap (INR bn/USD mn)

:683.2/17,257.0

FY09E) and cost savings/synergy benefits (of USD 40 mn in FY09E).

Avg. Daily Vol. BSE/NSE (‘000) :

As a result,

4,165.5

consolidated PAT and EPS are expected to increase by 32% and 22%, respectively, in FY09E. We have valued each of the three key geographical segments of the company viz., Europe, India, and South East Asia by comparing with respective peers and arriving at

Share Holding Pattern (%)

applicable FY09E EV/EBITDA multiple for each geographical segment. We have been

Promoters

:

33.8

conservative in calculating the valuation multiples and hence, believe the risk to our fair

MFs, FIs & Banks

:

19.0

value per share is on the upside. Our fair value per share for Tata Steel works out to

FIIs

:

21.4

INR 1,219. We maintain ‘BUY’.

Others

:

25.8

FY07*

FY08E

FY09E

FY10E

Revenues (INR mn)

252,133

1,191,923

1,309,622

1,320,137

Rev. growth (%)

2,406.8

37,273.6

987.5

80.3

EBITDA (INR mn)

74,502

185,844

226,018

225,368

Net profit (INR mn)

41,773

95,712

126,394

116,698

Shares outstanding (mn)

580

822

893

893

EPS (INR)

72.0

116.4

141.6

130.7

6.6

61.6

21.6

(7.7)

13.0

8.0

6.6

7.2

EPS growth (%) P/E (x) EV/EBITDA (x) ROE (%)

9.2

7.3

6.1

6.1

33.5

45.0

39.8

30.5

1,200

7,000

900

5,250

600

3,500

300

1,750

Dec-06

* without Corus Edelweiss Research is also available on Bloomberg EDEL , Thomson First Call, Reuters and Factset.

1

Jun-07

Dec-07

('000)

Year to March

(INR)

Financials (consolidated)

Tata Steel

Investment Rationale Unique geographical presence in Asia and Europe Tata Steel is the only globally leading player, besides Arcelor Mittal, with strong presence in both Asia and Europe. This unique position provides the company the benefits of: (i) scale and premium positioning (due to its European operations); and (ii) strong margins and volume-based growth (due to its Asian operations). European operations accounted for more than three-fourth of revenues, while Asian operations accounted for nearly 60% of EBITDA in FY07 (see Charts 1 and 2). In the near term, we expect the high prices and volume from European operations to drive revenues while low cost Asian operations are expected to maintain profitability. In the long term, we expect Tata Steel’s Asian operations to show strong volume growth with margins being maintained, while in Europe we expect significant margin improvement due to captive raw material with small increase in volume. The recent strategic investments in Ivory Coast for iron ore (75% stake; reserves said to be between 700 mn tonnes and 1,000 mn tonnes) and Riversdale Mining for coking and thermal coal (35% stake; inferred resources of ~105 mn tonnes) are initiatives to strengthen raw material security at Corus. Tata Steel has guided for a raw material security of 60-80% in the next five years. We believe that with the above two mines expected to commence in about three years and considering their potential to meet all of Corus’s requirements, this target could possibly be surpassed and the company is likely to have 90% plus raw material security. Chart 1: European operations (Corus) accounted for 77% of revenue in FY07

S.E. Asia 7%

Europe 77%

Source: Company data

2

India 16%

Tata Steel

Chart 2: Asian operations accounted for 57% of EBITDA in FY07

S.E. Asia 4%

India 53% Europe 43%

Source: Company data

Truly global company with diversified revenue mix In our view, a global steel company must not only have geographically diversified sales but also manufacturing facilities located in different regions, enabling it to enjoy benefits realized locally. Chart 3: Tata Steel: Leapfrogging into the global league

10 8 Corus acqusition has enabled Tata Steel to become a diverse, global player

Tata Corus 6 4

US Steel Posco

Tata Steel (before)

Riva 2

Nucor

Tangshan

Baosteel

JFE

Geographical diversity

Arcelor Mittal

Nippon 0

0

9

18 27 Portfolio diversity

36

45

Source: Edelweiss research

As set out in Charts 3 and 4, on this scale, we consider Tata Steel more global than its Asian counterparts such as Baosteel, POSCO, JFE, and Nippon (with presence only in Asia) or European counterparts such as Thyssen Krupp and Riva (with presence only in Europe).

3

Tata Steel

Chart 4: Tata Steel’s facilities spread all over the globe

Source: Company data

From a primarily India-centric sales structure prior to the Corus acquisition, Tata Steel earns close to 37% of its revenue from Europe and 8% from the reviving North American markets (Charts 5 and 6). Chart 5: Revenue mix of Tata Steel India (pre acquisition)

Other-Asia 23%

India 69%

Source: Company data

4

ROW 8%

Tata Steel

Chart 6: Consolidated revenue mix (post acquisition)

North America 8%

UK 22%

Europe 37% Asia 24% ROW 9%

Source: Company data

Earlier, the acquisition of Singapore-based NatSteel and Thailand’s Millennium Steel gave Tata Steel access to six key Asian steel markets—China, Thailand, Vietnam, Malaysia, Australia, and Philippines. Thus, among the global top ten players, Tata Steel has a huge footprint in South East Asia surpassing even that of Arcelor Mittal and the company is well placed to tap emerging opportunities in the Asian market. Europe and NAFTA likely to account for ~45% of global premium flats in CY10E…. Global premium flats consumption (see Chart 7) is expected to grow at a CAGR of 6.4% through CY15E while consumption of total flats (including commodity flats) is likely to grow at a CAGR of 3.4% over the same period. Europe and NAFTA, Corus’s primary markets, are expected to account for ~45% of total premium products consumption in CY10E, followed by Asia at 22% (Chart 8). Chart 7: Premium products demand through CY15E

800 Global demand for premium products expected to grow at 6.4% CAGR

600 500 400 300 2005

2010E Commodities

Source: CRU

5

Premium products

2015E

mtpa

700

Tata Steel

Chart 8: Premium products demand split in CY10E

ROW 8% Asia 22% Europe 24% 220mtpa

China 19%

North America 20% CIS 4%

South America 3%

Source: CRU

We view this as positive for the company, since it opens fresh opportunities to increase its value-added portfolio, realizations, and improve profitability. …..flats’ realisation expected to rise by USD 80/tonne in FY09E European steel prices have risen throughout CY07 and have surprised on the upside in Q3CY07. CY08/FY09E should see significant increase in raw material prices leading to cost push on steel prices in a firm demand environment. We are estimating iron ore costs to increase by 35%, coking coal/coke costs by 25%, and flats’ blended realizations to increase by 9.7% (all in USD terms) in CY08-09 for Corus. We estimate the absolute increase in flats blended realization for Corus in FY09E to be ~USD 80/tonne in comparison to total expected increase in raw material cost of ~USD 110/tonne (of steel). Considering Corus’s premium products and market standing and the overall firm demand conditions in Europe, we are confident that the company will be able to effect such an increase. According to market sources Arcelor Mittal is contemplating a price hike of USD 110/tonne for HRC for CY08 (in comparison our assumption of USD 80/tonne increase for Corus is for a more valued-added flats basket, including CRC and galvanized steel) so as to pass on the entire increase in raw material costs. In the US, steel prices have started moving up in recent months. Although demand fundamentals in the US are still far from encouraging, factors such as low import pressure due to Chinese government’s export policy, weak US dollar with respect to Euro (which has caused European prices to remain at premium to US prices since the beginning of this year) and continued destocking since December 2006 which has pushed stocks at service centers to extremely low levels, have pushed prices up. Since September 2007, steel makers in the US have been trying (and succeeded) to effect price hikes. In flats, after a first round of hikes in Q4CY07 of USD 30-40/s. tonne, steel makers are pushing for another hike of the same quantum. In longs, after two successful price hikes of USD 30/s.tonne each for October and November deliveries, Arcelor Mittal is trying for a further hike of USD 40/s.tonne for January deliveries. International Iron and Steel Institute (IISI) has forecast a 4% steel demand growth in the US for CY08. Hence, we believe, US steel makers (like their European counterparts) will not settle for any margin squeeze due to high raw material prices and expect prices to remain firm for the next year. 6

Tata Steel

Asian steel consumption likely to grow at 9% on an average until CY08E We expect Asia to continue to be the driver of global steel consumption in CY08E. As compared to global steel consumption growth of 6.8% on an average in CY08E, Asian steel consumption is expected to grow at ~9% in CY08E (Table 1). Table 1: Steel consumption expected to grow at average 9% in Asia until CY08E (mt) Regions

CY06

CY07E

CY08E

EU-27

184.9

192.2

195.0

11.4

Other Europe

27.2

29.3

31.0

C.I.S.

50.0

59.8

65.2

155.7

148.1

Central & South America

35.6

Africa Middle East

N.A.F.T.A.

Asia (inc. Oceania) Total

% 05/06 % 06/07E

% 07/08E

4.0

1.4

11.0

7.8

5.7

18.1

19.5

8.9

153.9

11.5

(4.9)

4.0

39.5

41.6

11.8

10.9

5.2

23.1

25.1

27.5

11.4

8.9

9.5

37.3

40.4

43.4

9.8

8.4

7.5

607.2

663.2

721.1

6.2

9.2

8.7

1,121.0

1,197.6

1,278.7

8.8

6.8

6.8

Source: IISI

Steel up cycle more favorable for scaled players We estimate the average incremental increase in EBITDA to be roughly around 4% for per unit increase in revenue for Corus (assuming no change in cost structure). Besides having a unique global presence, Tata Steel is also among the top 10 steel makers in both flats and longs. Besides Tata Steel, only Arcelor Mittal, Nippon, JFE Steel, and the Riva Group have a significant presence in both the products (see Tables 2 and 3). We believe this balanced presence in both segments places Tata Steel in a better position to benefit from overall steel up cycle as we are witnessing now. Table 2: Ranking: Flats manufacturers

Table 3: Ranking: Longs manufacturers

Company

Base

Capacity mtpa

Mittal Arcelor

UK

US Steel Group

USA

31.6

Nippon Steel

Japan

29.9

JFE Steel Group

Japan

Company

Base

Mittal Arcelor

UK

47.3

Gerdau Group

Brazil

19.5

Evrazholding

Russia

14.7

29.7

Tata Corus

India

10.7

103.1

Capacity mtpa

Posco Group

Korea

25.6

Nippon Steel

Japan

10.5

Shanghai Baosteel Group

China

20.1

Industrial Union of Donbass

Ukraine

10.1

Thyssen Krupp Stahl

Germany

18.2

JFE Steel Group

Japan

9.5

Tata Corus Group

India

16.6

Nucor Group

USA

8.9

China Steel Group

Taiwan

12.7

Riva Group

Italy

8.6

Riva Group

Italy

12.0

Celsa Group

Spain

8.2

Source: Steel World

Source: Steel World

Except Arcelor Mittal, all the other steel players are geographically concentrated. This leaves Arcelor Mittal and Tata Steel as the only two players who are spread geographically as well as have a comprehensive product mix. Future expansion: ~28mtpa capacity proposed to be added in India by CY15E Tata Steel has ambitious plans to raise the total steel capacity of its Indian operations to 33 mtpa by CY15E from the current 5 mtpa (Table 4). This includes brownfield expansion at the Jamshedpur plant and greenfield expansions at Orissa, Chhattisgarh, and Jharkhand.

7

Tata Steel

Table 4: Indian operations capacity proposed to be 33 mtpa by CY15E Location Jamshedpur, India

Description Boost current 5mtpa capacity by 1.8mtpa

Investment USD 1.1 bn

Operational status Mid-2008

Increase flats capacity by 2.9mtpa

USD 2.3 bn

Post 2010

Orissa, India

6mtpa integrated steelworks: HRC, CRC, Longs

USD 4.0 bn

2011

Jharkhand, India

12mtpa integrated steelworks: Slabs, HRC, CRC, Longs

Chhattisgarh, India

5mtpa integrated steelworks: Longs

USD 10.0 bn

To commence in 2012

USD 3.5 bn

To commence in 2012

Source: Company data, Edelweiss research

The greenfield projects will include captive iron ore mines in their scope. The comprehensive nature of the proposed product range (encompassing both flats and longs) indicates that Tata Steel is looking to maintain a balanced portfolio. Shipments from Asian operations expected to be up 33% at nearly 12 mt in FY10E: We are upbeat about expansion of Tata Steel’s Asian operations and expect a 33% increase in shipments from Asian operations by FY10E (Chart 9).

Chart 9: Finished products sales expected at nearly 34mt by FY10E 35 Europe

S.E. Asia

4.9 28

3.6

21 22.6 21.1

14

(mn tonnes)

India

7 4.9

6.7

FY07

FY10E

0

Source: Company data, Edelweiss research

Multi-dimensional synergies with Corus expected at USD 450 mn We expect synergies with Corus in all aspects of steel making—research and development, technology sharing, portfolio enrichment, product and process flow, besides operational and financial benefits due to scale (see Table 5). Table 5: Multi-dimensional synergies with Corus Dimensions Synergies at Corus level

Description Raw material self sufficiency

Amount USD 250 mn

Value addition and de-bottlenecking Higher capacity utilization Negotiation with suppliers Synergies at Tata Steel (India) level

Product portfolio enrichment

USD 100 mn

IJmuiden best practices Negotiation with suppliers Financial synergies

Tax synergies Interest cost reduction on Corus financing

Source: Company data, Edelweiss research

8

USD 100 mn

Tata Steel

We expect these synergies to be realized ahead of schedule, given the management’s commitment and groundwork towards achieving the same is already in progress. Capacity utilization at Corus expected to go up in the next two years…. We expect Corus’s capacity utilization to go up in the next two years from 88% in FY07 to over 96% in FY10E (Table 6) as a result of de-bottlenecking and productivity improvement, particularly at UK operations. Table 6: Capacity utilization expected to go up at Corus (mn tonnes)

FY07

FY08E

FY09E

Finished steel capacity

21.2

21.5

21.8

21.8

Finished steel production of which

18.8

20.5

20.9

20.9

11.3

12.5

12.9

12.9

7.5

8.0

8.0

8.0

88.5

95.2

95.7

95.7

Flats Longs Capacity utilization (%)

FY10E

Source: Edelweiss research

Tata Steel has a history of having very high capacity utilization with its Jamshedpur plant operating above 95% capacity utilization. We are confident of the company replicating this model at Corus through sharing of shop floor practices. Corus’s high end products align with Tata Steel’s strategic focus.… Corus’s product profile remains top drawer with construction, automotive, and even steel used in the aerospace industry and we expect Tata Steel to benefit from the same (Table 7). Corus’s flats range encompasses mainly value-added products and currently controls 14% of the European auto market. Table 7: Flat products enrichment Quarto plate

Coiled plate

HRC

CRC

HDG

√

√

√

√

√

√

√

Tata Corus

√

Prepainted √

Tinplate

Electrical sheet

√

√

√

√

Source: Steel Business Briefing

This is in alignment with Tata Steel’s strategic focus. The latter has in recent times increased its total market share in auto sales from 36% (~360kt) in 2003 to 44% (~870kt) in 2007 (Chart 10).

70

50

56

40

42

30

28

20

14

10

0

0 FY03

FY04 HRC

Source: Company data

9

FY05 CRC

FY06 HDG

FY07 Total (RHS)

% share (total)

% share (individual)

Chart 10: Focus on auto sector

Tata Steel

Tata Steel has no experience in heavy sections in specialty longs. The deal not only widens sales opportunities for structurals in Asia, but Corus’s beams-producing expertise can also be channeled for Tata Steel going forward (Table 8). Table 8: Long products enrichment Heavy sections

Medium sections

Merchant bars

√

√

Tata Corus

√

√

Rails √

Rod

Rebar

Wire

Welded tube

Engg/ Alloy steel

√

√

√

√

√

√

√

√

Source: Steel Business Briefing

As in flats, this is also in alignment with Tata Steel’s focus on the domestic construction sector. It has 26% market share in the construction sector products and we expect further gains for the company from the new technologies Corus has to offer. ….provide proprietary products for domestic auto and construction sectors Besides synergies arising from product portfolio enrichment, we are also optimistic on synergies to be realized in R&D. Corus has a strong R&D unit which employs around 950 researchers (Tata Steel employs 88). Apart from providing routine consultancy services, the team has been involved in two innovative products—HybrelTM and Ymagine. The former is a pioneer product in plating strip steel, a coating that combines properties of both metals and particles and the latter, a light gauge, pickled and oiled steel used in the automotive and construction sectors. We expect these proprietary technologies to complement Tata Steel’s brands which generated INR 46 bn revenue in FY07. Significant initiatives undertaken for improving Corus’s raw material security We are upbeat about two very recent developments that further strengthen our belief that Tata Steel will be able to improve margins at Corus through increased raw material security (Table 9). The company has recently entered into a transaction with Riversdale Mining for 35% stake in Benge and Tete coal mine licenses in Mozambique (inferred resources of ~105 mn tonnes) for USD 88.2 mn. This entitles the company to a 40% off take of coking coal and 35% of noncoking coal at commercial terms. We expect the development on this site to be easier since infrastructure in the region has already been developed by Vale (earlier CVRD) which owns the adjacent block. The company expects to share the cost of the infrastructure with Vale and start production in three years at the latest. Table 9: Raw material sufficiency improvement initiatives Projects Nimba iron ore project, Ivory Coast

Details 75% stake in 700-1,000 mn tonnes reserves

Status Agreement Signed

Benge and Tete licenses, Mozambique

35% stake in Riversdale’s Benge and Tete project (inferred reserves og 105 mn tonnes)

Agreement Signed

Australian coal mine

5% stake in Carborough Downs project (reserves 58 mn tonnes)

Agreement Signed

Richard Bay (South Africa) Ferrochrome project

135ktpa. Independent plant sourcing raw material locally

December-07

Source: Company data, Edelweiss research

Besides this, Tata Steel has also acquired 75% equity stake in Mount Nimba iron ore mine in Ivory Coast having 700-1,000 mn tonnes of iron ore reserves (preliminary estimates) with grade above 60% by Fe content. Balance stake will be held by a state-owned enterprise. The prospecting is still on and management expects to get the mine operational within three years. This project could potentially involve an investment of USD 1.5 bn in the next three years to

10

Tata Steel

develop the mine as well as supporting infrastructure. The project is expected to involve construction of a dedicated railway line and up gradation of the existing port infrastructure. We believe that Tata Steel is likely to undertake further such strategic investments in the near future and could end up with raw material self sufficiency of over 90%. Other multiple growth initiatives in pipeline Tata Steel has several other projects in the pipeline focusing on operational improvements at Corus and adding more capacity mainly in Asia. Corus: Another 0.6 mtpa capacity to come online by CY08E end Two major projects are being carried out at total investment of GBP 317 mn for installing a new continuous galvanizing line with a new three-stand CR mill at IJmuiden and sections mill at Scunthorpe for specialty longs for the construction sector (Table 10). Table 10: Corus projects Location

Description

IJmuiden

New galvanizing line and 3 stand CRM

Port Talbot

Blast furnace 4 & 5 – Heat Recovery

Scunthorpe

Section mill & rod mill

Teesside

Slab caster enhancement

Investment (GBP mn) 170

Operational status End of 2008

14

End of 2007

147

End of 2007

20

End of 2007

Source: Company data, Edelweiss research

Besides these, two other projects are in progress at Port Talbot and Teesside concentrating on improving the operational efficiency of blast furnace and slab caster, respectively. We expect the new capacity to come on line by CY08 and ramp up to happen in CY09/FY10E. Looking for a foothold in other countries The Middle East region throws up interesting possibilities in the coming few years. This region is similar to the Mediterranean region and has been historically a trading region with almost no domestic capacity. However, construction is being undertaken on at a great pace in this region currently, thus bolstering the demand for specialty sections. We view the 3 mtpa Iranian project (see Table 11) a positive step in this direction since it is based on DRI which is being used for manufacturing high quality sections worldwide. The project is also expected to be cost effective since energy forms a major chunk of the EAF cost which is available at low price in the gulf. However, this project is also exposed to serious political risk due to its location in Iran. Except for the Millennium Steel expansion we have not considered any of these projects in our earnings model. Table 11: Projects in other countries Projects Bandar Abbas, Iran

Details 3mtpa DRI-based steelworks (for billets)

Bangladesh

2.4mtpa steelworks

MOU signed Discussion stage

Coated steel JV with BlueScope

Construction products for Indian market

2009

Vietnam steel project

4.5mtpa. 65% stake in the steel plant and 30% stake in Thach Khe Ore JSC that controls Iron ore mining operations in Thach Khe Iron ore deposit

2017

Millennium Steel expansion

New 0.5mtpa blast furnace complex

Source: Company data, Edelweiss research

11

Status

Oct. 2008

Tata Steel

Valuations We have used the sum-of-the-parts (SOTP) approach by valuing the three geographical operations of Tata Steel (viz., Europe, India, and South East Asia) on FY09E EV/EBITDA multiple basis, thus taking into account the different sets of characteristics, risks, and growth opportunities associated with each of them. To arrive at suitable EV/EBITDA multiples for these geographical segments we have adopted the following approach: ♦

Select a set of peer companies for each segment.

♦

Rank all the companies, including the corresponding segment of Tata Steel. For this we believe following to be valuation drivers: •

Scale: Measured by revenue.

•

Profitability: Measured by EBITDA margin.

•

Growth: Measured by EBITDA growth over three year period up to CY10E

•

Return on equity.

Valuing Corus with respect to European peers For comparison, we have considered select European and Russian players such as Arcelor Mittal, Severstal, and Voestalpine MMK. We have ranked all the companies on the above valuation parameters viz., revenue, EBITDA margin, EBITDA growth, and RoE. Our analysis ranks Corus fifth among the peer group of 10 companies. In spite of this mid-point rank, we are conservatively ascribing an EV/EBITDA of 5.0x for FY09E for Corus, which is at a ~10% discount to the average multiple of 5.5 FY09E (Table 12). Considering Corus’s scale and premium product range, one could potentially argue for removing the discount but we have chosen to be conservative. Later in this section we have provided a sensitivity of the fair value per share of Tata Steel across various FY09E EV/EBITDA multiples for Corus.

Table 12: Comparative valuations for Corus

Companies

Mkt cap (USD mn)

Valuation parameters FY09E Rev FY09E EBITDA EBITDA growth USD (mn) margin (%) CAGR CY07-10E

FY09E RoE(%)

Points EBITDA EBITDA Revenue margin growth

Total EV/EBITDA points Rank FY09*

Voestalpine

11,224

15,705

18.7

19.5

25.4

7

3

9

8

27

1

6.2

NLMK

23,074

8,833

42.4

10.7

24.9

2

10

8

7

27

1

6.0

Evraz Group

27,684

13,426

33.8

(2.8)

31.3

5

9

1

10

25

3

6.5

MMK

14,991

9,165

28.6

1.7

27.7

3

8

5

9

25

3

5.5

103,241

105,709

19.2

1.4

18.8

10

4

4

4

22

5

6.5

22,724

17,433

27.1

2.9

15.8

8

7

6

1

22

5

4.8

ArcelorMittal Severstal Corus

NA

24,466

11.7

22.7

16.0

9

1

10

2

22

5

Rautaruukki

5,899

6,285

21.0

6.2

24.5

1

5

7

6

19

8

4.7

Ssab Svenskt

8,222

10,072

24.7

(1.8)

23.2

4

6

3

5

18

9

6.1

Salzgitter

8,984

15,423

13.0

(2.7)

17.6

6

2

2

3

13

10

Average ex-Corus Source: Bloomberg estimates, Edelweiss research

12

RoE

3.1 5.5

Note: * FY09E is taken as a proxy for CY08E

Tata Steel

Valuing Tata Steel India with respect to regional peers For Tata Steel India, we have considered regional peers such as JFE, Nippon, and POSCO from FarEast and Chinese players such as Angang and Baoshan. We have ranked all the companies on the above four parameters. Tata Steel India stands second in our ranking between two Chinese players—Angang Steel and Wuhan Steel—which are trading at FY09E of 11.5x and 12.0x, respectively (Table 13). Table 13: Comparative valuations for Tata Steel

Companies

Mkt cap (USD mn)

Valuation parameters FY09E Rev FY09E EBITDA EBITDA growth USD (mn) margin (%) CAGR CY07-10E

FY09E RoE(%)

Points EBITDA EBITDA Revenue margin growth

RoE

Total points

Rank

EV/EBITDA FY09*

Angang Steel

28,336

10,248

26.6

10.9

22.0

3

8

8

7

26

1

11.5

Sumitomo Metal Ind.

22,066

15,345

24.1

8.6

22.1

4

6

6

8

24

2

7.9

Tata Steel

19,070

6,176

45.9

19.2

17.4

1

9

9

5

24

2

Wuhan Iron & Steel

21,133

8,179

22.9

9.2

26.4

2

5

7

9

23

4

JFE Holdings Inc

30,765

30,845

22.4

6.0

19.7

7

4

4

6

21

5

6.0

POSCO

53,526

32,492

25.7

(2.1)

16.1

8

7

1

2

18

6

6.5 7.2

12.0

Nippon Steel

41,670

41,994

18.1

5.5

17.3

9

2

3

3

17

7

Baoshan Iron & Steel

41,800

27,264

20.5

4.3

17.3

6

3

2

4

15

8

8.1

Kobe Steel Ltd.

10,031

18,619

14.6

5.9

15.3

5

1

5

1

12

9

6.1

Average ex-Tata

8.2

Source: Bloomberg estimates, Edelweiss research

Note: * FY09E is taken as a proxy for CY08E

Tata Steel India’s No. 2 rank is due to its high EBITDA margin (~44%) and strong profit growth going forward, even though it loses out on the scale parameter. In spite of this, we would like to be conservative and choose to value Tata Steel India at EV/EBITDA multiple of 8.5, close to the average EV/EBITDA of 8.2x for the peer group. It may be mentioned that players ranked 1 and 4 have a much higher EV/EBITDA of 11.5x and 12.0x, respectively. Valuing South East Asian operations at discount to Tata Steel India We value South East Asian operations on EV/EBITDA of 4.2x (a 50% discount to the multiple for Tata Steel India). These operations are low on scale, have no raw material security, and manufacture longs (having less realization than flats).

13

Tata Steel

Our SOTP valuation gives a fair value of INR 1,219/share Table 14 sets out the valuation details of Tata Steel. Table 14: SOTP valuation EV/EBITDA valuation for consolidated Tata Steel Corus FY09E EBITDA

USD mn

2,771

EV/EBITDA multiple

x

Corus EV

USD mn

13,949

5.0

Tata Steel India FY09E EBITDA

USD mn

2,836

EV/EBITDA multiple

x

Tata Steel India EV

USD mn

24,039

Other sub FY09E EBITDA

USD mn

189

EV/EBITDA multiple

x

Other sub EV

USD mn

801

Total EV

USD mn

38,789

Net debt

USD mn

14,563

Market cap

USD mn

24,225

Market cap

INR mn

944,784

No. of shares

mn

852

Base price per share

INR

1,108

8.5

4.2

Add : value of new projects/initiatives

INR

111

Fair value per share

INR

1,219

Current market price Upside

935 %

30.4

Source: Edelweiss research

We estimate the total EV at USD 38.8 bn and after deducting net debt of USD 14.6 bn we arrive at equity valuation of USD 24.2 bn. We estimate the present fully diluted number of shares at 852 mn after taking into account all the current issuances including rights equity, CCPS (cumulative convertible preference shares), and CARS (foreign currency convertible alternative reference securities). The CARS being non-voting we have attributed a 75% equivalence factor to them while adding to the voting shares. The base price per share works out to INR 1,108 per share. We estimate fair value at 10% higher after considering the following: •

Asset value of the mines in Ivory Coast and Mozambique.

•

Present value of the proposed expansion projects at Jamshedpur, Orissa, Chattisgarh, and Jharkhand.

Sensitivity analysis of fair value We have done sensitivity analysis on the fair value on two counts: •

Range of EV/EBITDA multiples for Tata Steel India and Corus.

•

Different scenarios for increase/decrease in selling prices and raw material prices over base case.

Sensitivity on multiples We have done sensitivity analysis on EV/EBITDA multiple ranges covering most of the companies in the European sector (for Corus) and Asian sector (for Tata Steel India). As set out in Table 15, for Corus, the range is between Severstal (4.8x in CY08) and Arcelor Mittal (6.5x in CY08) and for Tata Steel India, we have a range between POSCO (6.5x in CY08) and Wuhan Steel (12.0x in CY08).

14

Tata Steel

Even if one discounts Corus further and considers an EV/EBITDA multiple of 4.5, the fair value of share is still above INR 1,000/share. Post even partial raw material security for Corus in the future, we believe Corus’s operations should be valued at forward EV/EBITDA of 5.5x; still at a discount to Arcelor Mittal but implying a further upside to our fair price. Table 15: Sensitivity analysis at various multiples for Corus and Tata Steel India EV/EBITDA multiple range for Corus EV/EBITDA Multiple range for Tata Steel India

INR/share POSCO

Arcelor Mittal

Severstal

1,219

4.0

4.5

5.0

5.5

6.0

6.5

6.5

780

854

924

994

1,064

1,133

7.5

927

1,002

1,072

1,141

1,211

1,281

8.5

1,075

1,149

1,219

1,289

1,359

1,428

9.5

1,222

1,297

1,367

1,436

1,506

1,576

10.5

1,370

1,444

1,514

1,584

1,653

1,723

Angang

11.5

1,517

1,592

1,661

1,731

1,801

1,871

Wuhan

12.5

1,665

1,739

1,809

1,879

1,948

2,018

Source: Edelweiss research

With the 1.8 mtpa expansion in Jamshedpur on track, we expect an improvement in Tata Steel India’s operational scale through to FY10E. Coupled with high, sustained level of raw material security in India and considering its No. 2 rank among its peers, one can justify a higher multiple for Tata Steel India compared to our assumption which would imply an upside to our fair price. Overall, we believe our multiples are on the conservative side and hence, there may be upside from a possible re-rating (albeit a moderate one if it does happen) going forward. Sensitivity on steel and raw material prices for Corus We have set out the sensitivity of steel and raw material prices (iron ore and coking coal) to our assumptions for Corus in FY09 (Table 16). The valuation is more sensitive to the changes in steel prices than prices of raw materials due to higher proportion of premium products which are affected the most either way. Table 16: Steel and raw material price sensitivity Steel price change (%) Raw matl. price change (%)

INR/share

1,219

-5%

-3%

0%

3%

5%

-10%

936

1,133

1,347

1,578

1,828

-5%

872

1,070

1,283

1,514

1,764

0%

808

1,006

1,219

1,450

1,700

5%

745

942

1,155

1,386

1,636

10%

681

878

1,091

1,322

1,572

Source: Edelweiss research

For Corus, raw material cost is about 60% of the revenue hence the effect of raw material cost changes is a bit less. With prices looking strong due to steady demand in Europe and iron ore and coking coal price hikes factored in our model, we are confident of our base case valuation.

15

Tata Steel

Key Risks ♦

Raw material security: Post Corus acquisition, the raw material self sufficiency of Tata Steel has dropped to 20% (earlier 100%) for iron ore and 15% (earlier 70%) for coking coal. This reduced raw material security exposes the consolidated entity to margin decline in the event it is unable to effect adequate price hikes.

♦

Steel demand in Europe may slow down: We expect Corus to benefit from higher price realization owing to stable demand in Europe in the medium term. However, if the same slows down and prices start moderating earlier than anticipated, there is a significant risk of margins taking a hit since over 60% of Tata Steel’s volumes are from European operations.

♦

Extent of synergies realized through Corus acquisition: We believe the scope of synergies with Corus is significant. These are expected to bring in benefits of USD 450 mn by reducing cost at Corus on one hand and enriching Tata Steel’s product portfolio on the other, besides providing benefits due to scale and tax savings. It will be crucial to see the quantum and timing of these benefits, although we are confident of a positive outcome, given the management’s intentions and abilities.

16

Tata Steel

Company Description Established 100 years ago in 1907, Tata Steel is Asia’s first and India’s largest private sector steel company. With the take over of Corus Steel, Tata Steel is now the sixth largest steel company in the world with presence in India, South East Asia, UK, and continental Europe. The flagship company of the Tata Group, Tata Steel India’s operations are amongst the lowest cost producers of steel in the world and for two consecutive years has been ranked as the world’s ‘Best Steel Maker’ by World Steel Dynamics. Tata Steel has a state-of-the-art ~5 mtpa steel making facility at Jamshedpur in Jharkhand. Including Corus, the total consolidated capacity is now ~28 mtpa and there are ~82,700 employees across four continents. Tata Steel’s products are targeted at the quality conscious auto sector and the burgeoning construction industry. With wire manufacturing facilities in India, Sri Lanka, and Thailand, the company plans to emerge as a major global player in the wire business. Acquisition of Corus has added a new dimension to Tata Steel and propelled it from a domestic player into the league of truly global steel companies such as Arcelor Mittal, POSCO, and Nippon Steel. Corus was formed in October 1999 by the merger of British Steel Plc and Koninklijke Hoogovens NV and in April 2007 became a subsidiary of Tata Steel. It is Europe’s second largest steel producer with revenues of USD 17.9 bn and crude steel production of 18.3 mn tones in 2006, primarily in the UK and the Netherlands. Corus comprises three divisions—Strip Products, Long Products, and Distribution & Building Systems—and has a global network of sales offices and service centers. Table 17: Corus acquisition financing details USD 13,600 mn

Acquisition consideration Acquisition financing Entity

Instrument

Tata Steel India

Pref allotment to promoters

Status Completed

Internal accruals

700

- do -

CARS (non-voting shares)

900

- do -

900

- do -

1,400

- do -

Foreign offering

1,050

Proposed

Debt

1,650

Completed

Total

7,200

Rights issue - straight equity Rights issue - CCPS

Tata Steel UK

Amt (USD mn) 600

Debt

6,400

Total

13,600

Completed

Source: Company data, Edelweiss research

Manufacturing facilities Corus has manufacturing operations in several countries with major plants located in the UK, The Netherlands, Germany, France, Norway, and Belgium. The company produces carbon steel by the basic oxygen (BOF) steel making method at four integrated steelworks at Port Talbot, Scunthorpe, and Teesside in the UK and at IJmuiden in The Netherlands. Engineering steels are produced at Rotherham, UK, using the electric arc furnace (EAF) method. The IJmuiden plant is Corus’s largest and one of Europe’s most efficient plants (Table 18).

17

Tata Steel

Table 18: Corus-Production facilities, output and utilization (CY06) Production capacity

Major production facilities CY06 (mn tonnes)

Actual output

% of capacity

Port Talbot Steelworks, West Glamorgan, UK

4.7

4.0

94

Scunthorpe Steelworks, South Humberside, UK

4.5

4.1

91

Teesside Steelworks, Redcar, Cleveland, UK

3.9

3.1

79

Rotherham Steelworks, South Yorkshire, UK

1.3

0.9

69

IJmuiden Steelworks, Netherlands* Total

6.8

6.2

91

21.2

18.3

86

Source: Company data Note: *IJmuiden Steelworks is in the process of increasing steel-making capacity to 7.5mtpa by 2010

Divisions of Corus Corus is organized broadly into three main divisions, viz. strip products, long products, and distribution & building systems (Table 19). The strip products division manufactures hot rolled, cold rolled and metallic-coated steels for many industries. The division’s packaging unit supplies light gauge steel for packaging and non-packaging applications. In CY06, the strip products division contributed 48% to revenues and 45% to the sales volume. It also contributed 73% to the EBITDA and enjoyed a comparatively high EBITDA margin of ~10%. The long products division comprises the manufacture of plates, sections, wire rods, precision components, engineering and semi-finished steel. It caters to the construction and industrial, aviation, shipping, mining, and railway industries. In CY06, the division contributed 24% to revenues and 29% to the sales volume. It contributed 14% to the EBITDA and had an average EBITDA margin of ~4%. The distribution and building systems division covers service centers, stockholding and further materials processing including building products. It also provides a wide range of consultancy services from iron ore mining through to the marketing of finished products. In CY06, the division contributed 28% to revenues and 26% to the sales volume. It contributed 14% to the EBITDA and had an average EBITDA margin of ~3%. Table 19: Divisional performance of Corus in CY06 Parameters CY06

Units

Gross shipments

kt

Gross revenue Realization per tonne EBITDA EBITDA margin Product portfolio

GBP mn GBP GBP mn %

Strip products division

Long products division

11,386

7,281

6,612

5,366 471 530 9.9 - HRC, CRC, metallic coated steel

2,698 371 102 3.8 - plates, sections, wire rod and semi-finished steel

3,115 471 99 3.2 - service centres, stockholding and further materials processing including building products

- light gauge steel for packaging

- engineering steel products

- supply chain service business,

- hot finished and cold formed steel tubular products

- rail products

- consultany services from iron ore mining through to the marketing of finished products

- colored pre-finished steels

- precision strip products

- special strip channels

- hot-rolled special shaped steel

- specialized steel for white goods Source: Company data

18

Dist. & bldg systems division

Tata Steel

Industry Overview Steel prices expected to rise on back of higher raw material prices In CY07, prices of steel making raw materials i.e., iron ore and coking coal, have continued to rise. On one hand, demand continues to grow, on the other, supply is restrained due to infrastructure issues, government regulations, and port congestion. So far, until November 2007, world crude steel production has gone up by 7.7% (Table 20). Table 20: Steel consumption continues to grow, especially in Asia Region (In '000 tonnes)

11 months CY07

11 months CY06

193,314

190,358

1.6

27,864

25,581

8.9

EU-27 Other Europe

% increase

CIS

113,272

108,915

4.0

NAFTA

121,619

121,871

-0.2

Latin America

43,897

41,493

5.8

Africa

16,932

16,781

0.9

Middle East

14,363

13,534

6.1

447,832

383,615

16.7 7.3

China India

48,356

45,074

175,424

168,788

3.9

8,043

7,968

0.9

1,210,916

1,123,978

7.7

Other Asia Oceania Total World Source: IISI

With global demand estimated to grow at 6.8% Y-o-Y in both CY07 and CY08 and steel makers not willing to take any margin squeeze, we expect global prices will be negotiated at higher rates for CY08. Additionally, we have seen signs of recovery in the US market with producers attempting (and succeeding) to effect price hikes. Our FY09 iron ore and coking coal cost estimates are up 35% and 15% Y-o-Y Demand for steel making raw material is buoyant. On the supply side, there is no improvement on the iron ore front and infrastructure bottlenecks continue to stymie even the existing capacities in Australia and Brazil. Chart 11: Iron ore and coking coal expected to remain firm through to CY10 170

Iron ore Coking coal (Hard)

122

Up 25% in FY09E Up 35% in FY09E and 10% in FY10E

Moderation not 98 expected until FY11E 74

Source: Edelweiss research

19

4Q 2010

3Q 2010

2Q 2010

1Q 2010

4Q 2009

3Q 2009

2Q 2009

1Q 2009

4Q 2008

3Q 2008

2Q 2008

1Q 2008

4Q 2007

3Q 2007

2Q 2007

1Q 2007

4Q 2006

3Q 2006

2Q 2006

1Q 2006

50

(USD/tonne)

146

Tata Steel

We have increased our cost estimates for Corus for iron ore by 35% to USD 107.7/tonne from FY09 and further up 10% to USD 118.5/tonne from FY10 (Chart 11). On the coking coal front, China’s return to a net importer position in coal has tightened the global market considerably with focus shifting to Indonesia and Australia. A combination of maintenance expansion work, shortage of rail capacity, and port congestion continues to constrain Australian coal expansion. Freight rates are also at an all time high with latest shipping rates from Australia to India reported to be up 50% to USD 60/tonne as compared to July. We have increased our estimates for hard coking coal costs for Corus upwards by 25% to USD 159/tonne from FY09. We expect coking coal prices to be flat in FY10E . European sheet prices continue to hold firm European steel prices have been continuously rising this year. Till date, European prices have gone up by 10% as compared to CY06 average. We expect the growth momentum to sustain based on stable demand in Europe (Table 21). Table 21: Steel prices have gone up through out this year USD/tonne

CY06

Q1CY07

Q2CY07

HRC

584

608

661

CRC

707

716

753

HDG

811

872

910

Average

701

732

775

Q-o-Q chg (%) Q3CY07 9.0 682 5.0 771 4.0 909 6.0 787

Q-o-Q chg (%) 3.0 2.0 0.0 2.0

Q4CY07 Q-o-Q chg (%) 695 806 828 776

2.0 5.0 (9.0) (1.0)

Source: CRU

Recently, at an IISI annual conference, Germany's large steel companies indicated that increased input prices (including iron ore, logistics, and energy costs) will translate to an increase in steel prices by USD 60-100/tonne next year.

20

Tata Steel

Financial Outlook Consolidated EBITDA expected to cross INR 200 bn by FY09E Global steel prices have generally remained at an all time high for CY07. We expect European HRC prices to go up by USD 80-110/tonne on an average next year. Asia, with is strong consumption growth, is also expected to witness price hikes next year. Recently, SAIL has announced that it expects steel prices to go up by USD 25-50/tonne in early CY08. We expect this to be the likely scenario since steel makers are not willing to settle for any margin squeeze due to high raw material prices in the face of firm steel demand. Table 22: Key assumptions Units

FY07

FY08E

FY09E

FY10E

Tata Steel Crude steel capacity

mn tonnes

Utilization

%

4.8

4.8

6.6

6.6

102.5

108.6

93.1

101.6

Sales volume

mn tonnes

4.9

5.2

6.2

6.7

Average realization

USD/tonne

787

929

1004

1030

Average cost of production

USD/tonne

474

527

543

567

EBITDA

USD/tonne

313

402

461

463

Crude steel capacity

mn tonnes

21.2

21.5

21.8

21.8

Utilization

%

88.5

95.2

95.7

95.7

Sales volume

mn tonnes

18.8

20.5

20.9

20.9

Average realization

USD/tonne

854

981

1060

1074

Average cost of production

USD/tonne

795

878

940

960

EBITDA

USD/tonne

59

103

120

114

Corus

South East Asia Crude steel capacity

mn tonnes

1.7

1.7

2.2

2.2

Rolling Capacity

mn tonnes

3.7

4.0

4.1

4.1

Utilization

%

98.9

108.0

119.2

119.2

Sales volume

mn tonnes

3.6

4.3

4.9

4.9

Average realization

USD/tonne

466

566

596

618

Average cost of production

USD/tonne

437

524

558

578

EBITDA

USD/tonne

29

42

39

40

Source: Edelweiss research

Based on the expected increase in realizations and the proposed volume expansions, we expect FY08E consolidated EBITDA to reach INR 186 bn over revenues of INR 1,192 bn (Table 23). Table 23: Consolidated EBITDA likely to cross INR 200bn by FY09E

Revenue (INR mn) EBITDA (INR mn) EBITDA margin (%) PAT (INR mn) PAT margin (%) Source: Edelweiss research

21

FY07E

FY08E

Y-o-Y growth (%)

Y-o-Y

1,065,179

1,191,923

11.9

1,309,622

9.9

1,320,137

130,971

185,844

41.9

226,018

21.6

225,368

12.3

15.6

60,401

95,712

32.1

116,698

5.7

8.0

FY09E growth (%)

17.3 58.5

126,394 9.7

FY10E

Y-o-Y growth (%) 0.8 (0.3)

17.1 8.8

(7.7)

Tata Steel

In FY09E, we expect a further growth of 22% in EBITDA with 10% growth in revenue. This is due to favorable steel prices, increased shipments from more profitable Asian operations, and synergy benefits between Tata Steel and Corus of USD 40 mn. In FY10E, we expect a marginal decline in revenue and EBITDA since we expect a slight moderation in steel prices with raw material prices holding firm. Tata Steel standalone EBITDA margin likely to average 44% for next three years We expect the current 1.8 mtpa expansion programme at Tata Steel to enhance its profitability even more in the next two years. With steel prices expected to remain high, increased focus on value-added products and sufficient raw material security for its Indian operations, we believe that further growth in EBITDA margin is in store. Table 24: Tata Steel India-EBITDA margin expected at 45% on average for the coming two years FY07

FY08E

Y-o-Y growth (%)

Revenue (INR mn)

175,520

195,451

11.4

240,852

23.2

262,571

9.0

EBITDA (INR mn)

69,733

84,542

21.2

110,591

30.8

118,033

6.7

45.9

0.0

45.0

0.0

17.6

65,660

32.3

70,029

6.7

EBITDA margin (%) PAT (INR mn) PAT margin (%)

39.7

43.3

42,222

49,635

24.1

25.4

Y-o-Y FY09E growth (%)

FY10E

27.3

Y-o-Y growth (%)

26.7

Source: Edelweiss research

For the current fiscal year, we expect standalone EBITDA to be at INR 85 bn over revenue of INR 195 bn, resulting in a margin of 43%. We expect PAT at INR 50 bn implying a net margin of 25% (Table 24). For H1FY08, the standalone operations reported revenue of INR 89 bn and PAT of INR 24 bn, i.e., a margin of 26%. For the next two years on the back of volume-based growth in premium products, we expect EBITDA margin to remain within the 45-46% range. Corus: EBITDA margin expected to go up to 11% in FY09E Corus is very critical for Tata Steel’s performance due to its scale and product range (higher price realization). We believe Tata Steel’s first priority will be to secure the raw material for Corus. The recent strategic investments in Mozambique and Ivory Coast for coking coal and iron ore assets, respectively, are steps in this direction. Table 25: Corus-EBITDA margin likely to remain between 10% and 11% through to FY10E FY07E

FY08E

Y-o-Y growth (%)

FY09E

Revenue (INR mn)

813,046

898,678

10.5

955,946

EBITDA (INR mn)

56,470

94,003

66.5

108,057

6.9

10.5

18,628

43,036

2.3

4.8

EBITDA margin (%) PAT (INR mn) PAT margin (%)

FY10E

Y-o-Y growth (%)

6.4

943,614

(1.3)

15.0

99,912

(7.5)

Y-o-Y growth (%)

11.3 131.0

57,803

10.6 34.3

6.0

43,911

(24.0)

4.7

Source: Edelweiss research

We expect EBITDA margin to remain in the 10-11% range for the next two years led by a combination of increase in blended realizations (average 15% in FY08E and average 8% in FY09E), higher capacity utilization, and improved productivity. This is also in line with the estimated EBITDA margin for Corus for Q2FY08 and management’s guidance that margins will be maintained at Corus. In FY08E and FY09E, we expect EBITDA of INR 94 bn and INR 108 bn over revenue of INR 899 bn and INR 956 bn, respectively (Table 25).

22

Tata Steel

South-East Asia: Margin expected to remain stable over the next two years We are bullish on the steel consumption growth in South East Asia in the next few years. While price hikes are expected to be relatively modest (due to lower margin longs); some amount of volume growth and excellent distribution network is expected to maintain Tata Steel’s South East Asian operations’ margins stable between 6% and 7% over the next two years (Table 26). Table 26: South East Asia-EBITDA margin to remain between 6% and 7% through to FY10E FY07

FY08E

Y-o-Y growth (%)

FY09E

Revenue (INR mn)

76,613

97,794

27.6

112,824

EBITDA (INR mn)

4,769

7,299

53.1

7,371

6.2

7.5

PAT (INR mn)

(449)

3,042

PAT margin (%)

(0.6)

3.1

EBITDA margin (%)

FY10E

Y-o-Y growth (%)

15.4

113,952

1.0

1.0

7,423

0.7

Y-o-Y growth (%)

6.5 N/A

2,931 2.6

6.5 (3.6)

2,758

(5.9)

2.4

Source: Edelweiss research

For the current year, we expect an EBITDA margin of 7.5% over revenue of INR 98 bn. We believe the underlying robust demand will sustain through to FY10E and hence, we expect EBITDA margin to remain between and 6% and 7% over revenue of INR 112-113 bn in FY09E and FY10E. Tax benefits arising out of USD 2.2 bn tax losses in Corus We understand from management that unabsorbed tax losses of USD 2.2 bn at Corus are available for set off against future profits. As a result, we are estimating tax rate on consolidated basis at 21% for FY08E and 22% for FY09E.

23

Tata Steel

Financial Snapshots (Consolidated) Income statement Year to March Net sales & operating income Accretion to stock Raw material costs

(INR mn) FY06*

FY07*

FY08E

FY09E

FY10E

203,221

252,133

1,191,923

1,309,622

1,320,137

(470)

(5,402)

24,954

91,714

654,540

Purchase of goods

42,104

-

Employee expenses

16,725

18,850

109,111

Freight and handling expenses

12,254

15,084

Other expenses

43,434

57,387

139,777

Total operating expenses EBITDA Depreciation and amortisation EBIT

-

732,553 -

741,385 -

108,161

106,339

146,116

140,799

139,526

96,312

103,664

110,373

177,632

1,006,079

1,083,604

1,094,769

63,444

74,502

185,844

226,018

225,368

8,604

10,110

37,047

38,603

40,336

54,840

64,392

148,797

187,415

185,032

Interest expenses

1,616

4,112

37,979

35,669

32,098

Other income

2,467

4,381

10,240

10,842

11,580

(542)

(1,530)

(1,141)

(741)

(741)

55,150

63,130

119,918

161,847

163,772

Provision for tax

17,939

21,474

25,874

37,099

48,695

Profit before minority interest

37,211

41,656

94,044

124,747

115,077

186

675

1,347

1,578

1,647

Extraordinary items Profit before tax

Minority interest Share of profit of associates Profit after tax

322

792

3,014

3,225

3,267

37,346

41,773

95,712

126,394

116,698

Shares outstanding (mn)

553

580

822

893

893

Dividend per share (INR)

13.0

16.3

13.0

10.0

10.0

Dividend payout (%)

22.0

22.6

11.2

7.1

7.6

Common size metrics- as % of net revenues Year to March Operating expenses

FY06*

FY07*

FY08E

FY09E

FY10E

68.8

70.5

84.4

82.7

Depreciation

4.2

4.0

3.1

2.9

82.9 3.1

Interest expenditure

0.8

1.6

3.2

2.7

2.4

EBITDA margins

31.2

29.5

15.6

17.3

17.1

Net profit margins

18.3

16.5

7.9

9.5

8.7

FY06*

FY07*

FY08E

FY09E

FY10E

27.0

24.1

372.7

9.9

0.8 (0.3)

Growth metrics (%) Year to March Revenues EBITDA

2.3

17.4

149.5

21.6

PBT

1.3

14.5

90.0

35.0

1.2

Net profit

3.6

11.9

129.1

32.1

(7.7)

EPS

3.5

6.6

61.6

21.6

(7.7)

* without Corus

24

Tata Steel

Balance sheet

(INR mn)

As on 31st March

FY06*

FY07*

FY08E

FY09E

FY10E

Equity capital

5,530

5,798

8,221

8,926

8,926

1,645

9,100

9,100

0

Preference shares Reserves & surplus

97,288

138,953

261,828

337,368

399,787

Shareholders funds

102,818

146,397

279,149

355,394

408,713

Secured loans

25,034

49,612

444,806

398,536

398,287

Unsecured loans

8,740

199,643

212,761

212,284

212,045

Minority interest

1,236

5,984

6,823

7,915

9,090

0

5,363

5,168

5,070

9,922

7,859

7,569

9,335

11,242

14,026

11,183

27,532

26,155

25,095

Deferred Income Deferred tax liability Prov. for VRS Miscellaneous expenditure

2,560

0

0

0

0

Sources of funds

159,216

420,678

984,002

1,014,786

1,069,542

Gross block

179,881

234,102

950,623

978,491

981,544

Depreciation

71,058

91,896

588,965

609,400

640,170

Impairment

942

0

0

0

0

Net block

107,881

142,205

361,658

369,091

341,374

Total fixed assets

107,881

142,205

361,658

369,091

341,374

34,789

164,975

181,639

175,443

174,540

1,140

2,197

226,558

226,168

225,973

Investments Goodwill Loans and advances

11,382

13,492

137,302

149,170

149,922

Inventories

22,765

31,952

203,325

222,126

223,982

Sundry debtors

12,187

3,373

34,326

37,292

37,480

Cash and equivalents

7,768

108,880

65,660

76,524

76,892

Other current assets

4,980

26,745

28,452

29,213

29,774

Total current assets

59,081

184,441

469,064

514,325

518,050

Sundry creditors and others

32,925

17,916

172,137

186,464

166,440

Provisions

10,750

57,322

84,877

85,875

26,052

Total CL & provisions

43,675

73,140

254,916

270,241

190,395

Net current assets

15,406

111,301

214,148

244,084

327,655

159,216

420,678

984,002

1,014,786

1,069,542

186

252

340

398

458

Cash flow statement Year to March

FY06*

FY07*

FY08E

FY09E

(INR mn) FY10E

Net profit

37,211

41,656

94,044

124,747

115,077

8,604

10,110

37,047

38,603

40,336

(8,459) 37,355

2,941 55,030

71,111 202,202

74,184 237,535

15,666 171,079 (9,100)

Uses of funds Book value per share (BV) (INR)

Depreciation Working capital (+/-) post adjustments Operating cash flow Proceeds from Issue of Equity

7

15,403

9,878

705

Increase/ Decrease (+/-) in borrowings

450

203,397

414,513

(45,850)

590

Decrease/Increase (+/-) in investments

(8,446)

(132,094)

(241,025)

6,586

1,098

(7,117)

(7,168)

(12,266)

(10,245)

(10,245)

Capex

(19,348)

(37,617)

(416,522)

(177,868)

(153,054)

Financing cash flow

Dividend pay out including div tax

(34,454)

41,921

(245,422)

(226,671)

(170,711)

Opening cash FY

4,866

11,929

108,880

65,660

76,524

Net increase / Decrease in cash

2,902

96,951

(43,220)

10,864

368

Closing cash FY

7,768

108,880

65,660

76,524

76,892

* without Corus

25

Tata Steel

Ratios Year to March

FY06*

FY07*

ROE (%)

42.4

33.5

45.0

39.8

30.5

ROCE (%)

38.0

27.8

27.6

25.4

22.8

1.4

2.5

1.8

1.9

2.7

Current ratio Debtors (days)

FY08E

FY09E

FY10E

21.9

4.9

10.5

10.4

10.4

Fixed assets t/o (x)

1.9

1.8

3.3

3.5

3.9

Debt/ Equity

0.3

1.7

2.4

1.7

1.5

FY06*

FY07*

FY08E

FY09E

FY10E

67.6

72.0

116.4

141.6

130.7

3.5

6.6

61.6

21.6

(7.7)

CEPS (INR)

82.9

89.3

159.5

183.0

174.1

P/E (x)

13.8

13.0

8.0

6.6

7.2

Price/BV(x)

5.0

3.7

2.8

2.3

2.0

Market cap/Sales (x)

2.5

2.1

0.6

0.6

0.6

EV/Sales (x)

2.7

2.7

1.1

1.0

1.0

EV/EBITDA (x)

8.6

9.2

7.3

6.1

6.1

Valuations parameters Year to March EPS (INR)

Y-o-Y growth (%)

* without Corus

26

Tata Steel

Edelweiss Securities Limited, 14th Floor, Express Towers, Nariman Point, Mumbai – 400 021, Board: (91-22) 2286 4400, Email: [email protected] Naresh Kothari

Co-Head Institutional Equities

[email protected]

+91 22 2286 4246

Vikas Khemani

Co-Head Institutional Equities

[email protected]

+91 22 2286 4206

Shriram Iyer

Head Research

[email protected]

+91 22 2286 4256

Coverage group(s) of stocks by primary analyst(s): Metals & Mining: Adhunik Metaliks, Bhushan Steel & Strips, Hindalco Industries, Hindustan Zinc, Jindal Stainless, Jindal Steel & Power, JSW Steel, Monnet Ispat and Energy, National Aluminium Company, Sesa Goa, Steel Authority of India, Sterlite Industries (India), Tata Steel, Usha Martin

Tata Steel

Recent Research Date

1000

(INR)

860

Company

Price (INR)

Recos

3,593

Buy

167

Buy

07-Nov-07Monnet Ispat IPP financial closure in and Energy sight; Company Update

395

Buy

02-Nov-07

89

Buy

10-Dec-07 Sesa Goa

720

Title Structural change underway;

Company Update

580

29-Nov-07

440

Adhunik Metaliks

Riches from the earth… and above;

Company Update

Dec-07

Nov-07

Oct-07

Sep-07

Aug-07

Jul-07

Jun-07

Apr-07

May-07

Mar-07

Feb-07

Jan-07

Dec-06

300

Distribution of Ratings / Market Cap

Rating Distribution*

Rating

Accumulate

Reduce

107

45

18

Sell 3

Total

Result Update

Expected to

Buy

appreciate more than 20% over a 12-month period

Accumulate

appreciate up to 20% over a 12-month period

Reduce

depreciate up to 10% over a 12-month period

Sell

depreciate more than 10% over a 12-month period

193

* 13 stocks under review / 7 rating withheld

Market Cap (INR)

On track

Rating Interpretation

Edelweiss Research Coverage Universe Buy

Usha Martin

> 50bn

Between 10bn and 50 bn

< 10bn

104

69

20

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