Tata Steel
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India Research Stock Data No. of shares* Market cap ^ 52 week high/low Avg. daily vol. (6mth) Bloomberg code Reuters code
Tata Steel
: 901mn : Rs 420bn : Rs.731/ Rs.399 : 4.4mn shares : TATA IN : TISC.BO
* Fully diluted equity ^ Mkt Cap based on current equity
Relative to Sector:
Shareholding (%)Jun-07 QoQ chg Promoters FIIs MFs / UTI Banks / FIs Others
: : : : :
33.8 22.7 2.1 15.6 25.8
Rs 690 Target Price: Rs 657
Neutral
Potential Upside: -5%
3.3 5.2 (1.1) (3.0) (4.4)
Relative Performance 200 150
Short term challenges before long term gain
100 50 Jun-06
Dec-06
Sensex
Jun-07 Tata Steel
Source: ENAM Research, Bloomberg
Financial summary Sales (Rs mn)
Y/E March 2006 2007 2008E 2009E
151,394 175,520 1,185,605 1,185,621
PAT (Rs mn) 34,177 42,647 65,770 76,577
Cons. EPS* (Rs.) 86.2 92.4
EPS (Rs.)
Change (YoY %)
37.9 47.3 73.0 85.0
0.26 25 54 16
P/E (x)
D/E (x)
14.1 9.5 9.4 8.1
0.3 0.7 1.8 1.6
RoE (%) 41.8 36.5 22.1 24.8
RoCE (%) 49.2 36.4 17.4 18.4
EV/EBITDA (x)
DPS (Rs)
4.7 3.1 5.4 5.4
14.8 14.8 14.8 14.8
Source: *Consensus broker estimates, Company, ENAM estimates on fully diluted equity. Note:- FY08 & FY09 estimates are on Tata + Corus consolidated basis. .
Jagdishwar Toppo
[email protected] (+91 22 6754 7605)
Associate: Ravindra Deshpande [email protected]
August 31, 2007 1
Table of contents Slide No. Â Executive Summary
3
 Short term challenges
5
 Long term outlook
8
 Industry outlook
12
 Financials & Valuations
15
 Annexure
18
2
Executive Summary  Milestones in the offing…
Key milestones
Equity raising and capacity expansion are the key to future success of Tata Steel
FY11
 … but not without short-term financial challenges:
Higher interest costs on bridge debt financing Tax inefficiencies for one of the SPVs (Tata Steel Asia)
 Thus, sustainable success hinges on:
FY10
Improving margin by enhancing integrated operations in India Corus synergy gains/ reducing the high operating leverage (See annexure 4)
FY09 FY08
High demand growth from the BRICs region Cost pressures to support steel prices Standalone players such as Corus are vulnerable
 Valuations:
Re-rating depends on completion of key milestones Key risks include financial leverage and low operating margin Maintain sector Neutral rating
Synergies gain & 3mnt Brownfield expansion
2 mnt Brownfield Capacity addition
Equity Raising
SPV Structure SPV Structure
 Sector outlook remains favourable
Green field expansion
Tata Steel (India)
Additional interest
Tax efficiency of borrowing
3bn equity yet to be raised
High
100% Tata Steel Asia Holdings Pte Ltd
Low
100% Tata Steel UK Ltd 100%
High
Corus Group Plc Source: Company, ENAM Research
3
Comparative valuations & Sensitivity Comparative Valuations Company
M Cap (USD mn)
Steel Capacity (mn tonnes)
D/E (x)
ROE (%) CY07/ FY08
P/E (x) CY07E/ CY08E/ FY08E FY09E
EV/EBITDA (x) CY07E/ CY08E/ FY08E FY09E
EV/Tonne Remark (USD)
Arcelor Mittal
90,331
117.2
0.6
19.3
9.8
8.8
6.7
6.3
1,052
No. 1 in the world
Nippon Steel Corp
47,193
32.7
0.6
17.4
15.8
14.0
8.2
8.1
1,858
No. 2 in the world
POSCO
47,681
30.1
0.2
16.5
11.0
10.3
7.2
6.8
1,803
No. 4 in the world
Tata Steel Ltd
8,631
23.3
1.8
22.1
9.4
8.1
5.4
5.4
1,020
No. 5 in the world
JSW Steel Ltd
2,184
4.1
1.3
24.7
7.2
6.1
6.0
5.1
1,280
Emerging No.2 in India
14,666
13.5
0.1
36.5
9.6
8.7
5.0
4.5
1,038
Largest player in India
SAIL
Source: Bloomberg, World Steel (IISI), Company, ENAM Research
Sensitivity Analysis EPS FY09E (Rs /share)
Cost of Iron Ore Coal Cost Less USD 40 Less USD 20 Base Case Plus USD 20 Plus USD 40
Less USD 20
Less USD 10
Base Case
Plus USD 10
Plus USD 20
116 109 101 93 85
108 101 93 85 77
100 93 85 77 69
92 85 77 69 61
84 77 69 61 53
Average realization (USD/MT) EPS FY09 (Rs/ share)
1,130
1,140
1,150
1,160
1,170
69
77
85
93
101
Source: Company, ENAM Research
4
Short term challenges
5
Key milestones & Valuation drivers  Large milestones
Financing Operations
FY11
 Valuations dependent on:
FY10
Successful execution
FY09
Greenfield expansion
Synergies gain & 3mn tonnes brownfield expansion
2 mn tonnes brownfield Capacity addition Valuation drivers
FY08
FY07
Corus Acquisition
FY08
Equity Raising Valuation Driver Valuation Dampener
Equity raising
Short term interest/ Tax
FY09
FY10
Volume/ Brownfield expansion
Synergy gain volume expansion
High financial Leverage
High operating leverage (see
annexure 4)
Re-rating would depend on equity raising & integrated brownfield expansion 6
Higher interest cost & low tax efficiency Funding requirement
(USD bn)
Already raised
100% Tata Steel Asia Holdings Pte Ltd 100% Tata Steel UK Ltd 100% Corus Group Plc
Tata Steel Equity
Total Equity – USD7.5bn
Debt
Right Issue Equity/ Quasi Equity (a)
Foreign Equity Offering (b)
a+b
1.3
0.5
2.6
0.4
3.0
4.8
Tata Steel Asia Quasi Equity
2.7
Corus NonRecourse Financing
6.1
6.1
Existing debt of Corus
0.8
0.8
Total EV
Short Term debt financing
Own cash
SPV Structure Tata Steel (India)
Yet to be raised
2.7
High
Overall lower/ higher effective tax rate (USD bn)
(INR bn)
FY08 (9 months)
3.0
94
Additional interest (nine months) @7%
0.2
7
Pre Tax profits (Consensus PBT)
-
80
As a %age of Consensus Pre Tax profits
-
8%
Source: Company, ENAM Research
High
Low
14.5
Short Term Bridge Debt Financing
Tax efficiency of borrowing
Consensus effective tax rate = 21.6%
(See annexure #1)
Additional interest for FY08 @ USD 0.2bn = 8% of consensus pre tax profit 7
Long term outlook
8
Strategy: Cost leadership + Differentiation Steel processing & Distribution Value added steel
Product
Cost leadership + Differentiation
Steel processing
Generic Strategy Differentiation (Customer Focus)
Technology intensive products India
South Asia
9 Technology Europe
9 New market/ Geographies
Value added products in India
9 New products/ segments Cost leadership (Global cost competitiveness) Generic strategy
Coking coal/ Gas
Raw Material
Iron & Steel making
Iron ore
Sizeable (one location) operation
9 Enhance scale 9 Access to cheap resources
Australia, Bangladesh? India
Value Value Chain chain
Source: ENAM Research
Sizeable Indian operation (3 locations)
FY07
9 Operational
Iran?
FY15
Time Geography
Strategic focus - integrated global expansion
9
Incremental EBITDA of USD 1bn EBITDA
Tata steel standalone
Corus CY06
Tata + Corus Integration Gain Long term
Scale benefit Output at Corus facilities to go up 400
0.6 0.4
EBITDA (USD bn)
Tata + Corus: Integration Gain EBITDA = USD 1.0 bn
(USD mn)
Technology transfer gain Tata Steel to gain from auto grade tech steel
Additional EBITDA USD 1 bn
Corus internal cost savings Restoring success initiative
Procurement savings Iron Ore
1.4
Ferro Alloy
600 1.7
Scrap replacement Corus: Scrap consumption to be replaced by Pig iron from Tata Steel Group Co Scrap consumption Nat Steel Scrap consumption sourced from Corus
Consumables Consumables saving
Source: Company, ENAM Research
Successful execution holds the key to synergies 10
Milestone: Integrated brownfield expansion 40 35
Tata Steel: Organic volume growth (mn tonnes)
34 6
30 25 20
Corus
5
18
Orissa
Brownfield expansion
15 10
3
2
Jamshedpur
5
Resource tieup
Steel Size (mn ton) Iron Ore Coal EBITDA Margin (%)
2010 +
2010
2008
2007
2007
0
Tata Steel Standalone
Corus
Tata+ Corus
Tata+ Corus after Brownfield Expansion (Tata Steel)
5
18
23
28%
100%
0%
20%
35%
60%
0%
15%
21%
40%+
8%+
14%+
20%+
Source: ENAM Research
Low margin Corus could be a drag. Key is to raise overall EBITDA margin 11
Industry outlook
12
Steel prices could rule firm 300 200 100 2007
2006
2005
2004
Incr. Demand
CIS HR Spot Price (RHS)
Steel price v/s capacity utilization 100%
(USD/ MT)
600 500
80%
400
60%
300
40%
200
20%
100
Utilisation (LHS)
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
0 1997
0% 1996
 We believe higher utilization level would keep steel prices in the new band of USD550-620/ tonne levels in the medium term
2003
2002
2001
2000
1999
1998
0
1995
 Cost pressures - iron ore, coal and freight straining supply (See the next slide)
500 400
Incr.Capacity
 Industry consolidation and cutbacks are the key price drivers
600
(USD/MT)
(mn tonnes)
1997
 Large Chinese capacity addition to replace old capacities and also for local consumptions
120 100 80 60 40 20 0 (20) (40)
1996
 Robust demand growth, driven by strong consumption in China and other EMs
Demand supply gap v/s pricing
1995
 China (~80% incremental demand /supply) remains a critical driver
CIS HR Spot Price (RHS)
Source: ENAM Research
13
Cost pressure set to increase Â
Cost pressure - iron ore, coal and freight straining supply
Â
Iron ore - Spot iron of prices currently 50% higher than current contract prices. Expected to rise significantly next year
Global coking coal price: 140
(USD/Tonne)
120 100 80
Japan
South Korea
(US$/t)
USA
40 20 2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
0
Cost of inputs: Iron ore-contract price FOB 60
(USD/ Tonne)
50 40 30 20 10 2007
2006
2005
Energy & Reductions Others
2004
Labour Ferrous raw material
2003
0 2002
400 350 300 250 200 150 100 50 0
China
Hot metal: Cost curve
Germany Italy France
HRC cost @440$/tonnes = Hot metal cost @320+ Processing cost@ 120
60
1980
20% of the world capacity will have variable cost in excess of USD 440 per tonne
India Ukraine Brazil Taiwan
Â
Coking coal – prices are expected to move higher next year
Russia
Â
Source: ENAM Research
14
Financials & Valuations
15
Tata Steel: Financials Income statement Y/E March
(Rs mn) 2006
2007
2008E
2009E
Net sales Other operating income Total income
149,101 2,293 151,394
173,216 2,304 175,520
1,183,278 1,183,224 2,327 2,397 1,185,605 1,185,621
Cost of goods sold Contribution (%) Advt/Sales/Distrn O/H
73,120
85,743
895,716
873,400
53
53
24
26
19,487
20,045
107,675
119,810
Operating Profit Other income
58,787 2,161
69,733 3,242
182,214 4,891
192,411 4,723
PBIDT Depreciation Interest Other pretax Pre-tax profit Tax provision (-) Minority Interests Associates Adjusted PAT E/o income / (Expense)
60,948 7,751 1,684 0 51,513 17,336 0 0 34,177 887
72,974 8,193 1,739 0 63,042 20,395 0 0 42,647 (426)
187,105 43,199 44,770 0 99,137 33,367 0 0 65,770 0
197,134 44,938 36,191 0 116,004 39,427 0 0 76,577 0
Reported PAT
35,064
42,222
65,770
76,577
Key ratios Y/E March
(%) 2006
2007
2008E
2009E
4.8
16.2
583.1
(0.0)
39.4 (0.8) 48.3 12.9 5.0 6.4
40.3 18.6 48.9 11.4 5.1 2.9
15.4 161.3 75.5 9.1 4.8 14.3
16.3 5.6 73.7 10.1 4.8 7.0
0.0 1.0
0.0 1.1
0.1 2.2
0.1 1.3
(26.9) 49.2 0.3 33.7 41.8 23.4
65.6 36.4 0.7 32.4 36.5 20.4
20.5 17.4 1.8 33.7 22.1 20.3
73.4 18.4 1.6 34.0 24.8 17.4
37.9 0.3 75.7 14.8
47.3 24.8 87.6 14.8
73.0 54.2 121.0 14.8
85.0 16.4 134.9 14.8
Sales growth OPM Oper. profit growth COGS / Net sales Overheads/Net sales Depreciation / G. block Effective interest rate Net wkg.cap / Net sales Net sales / Gr block (x) Incremental RoCE RoCE Debt / equity (x) Effective tax rate RoE Payout ratio (Div/NP) EPS (Rs.) EPS Growth CEPS (Rs.) DPS (Rs.)
Source: Company, ENAM estimates ; FY08E & FY09E: Tata Steel & Corus consolidated
16
Tata Steel: Financials Balance sheet Y/E March
(Rs mn) 2006
2007
2008E
2009E
Total assets Gross block Net fixed assets CWIP Investments Wkg. cap. (excl cash) Cash / Bank balance Others/Def tax assets
143,639 154,074 87,075 11,577 20,266 1,403 2,884 20,433
253,950 160,295 85,431 24,974 36,925 5,669 76,814 24,137
821,893 900,012 316,244 50,000 74,322 127,417 87,415 166,495
822,499 934,264 329,536 50,000 92,234 125,652 80,592 144,485
Capital employed Equity capital Reserves Borrowings Others
143,639 5,537 89,484 25,162 23,457
253,950 5,807 133,130 96,453 18,560
821,893 9,009 288,331 531,096 (6,543)
822,499 9,009 312,193 506,636 (5,339)
Cash flow
(Rs mn)
Y/E March
2006
Sources Cash profit (-) Dividends Retained earnings Issue of equity Borrowings Others
21,259 43,204 8,204 34,999 0 (2,236) (11,505)
Applications Capital expenditure Investments Net current assets Change in cash
21,259 15,281 5,527 34 417
2007
2008E
2009E
114,801 482,890 48,760 103,798 8,606 13,352 40,154 90,446 13,932 150,571 71,292 434,643 (10,577) (192,770)
63,858 121,764 13,352 108,412 (16) (24,460) (20,078)
114,801 19,946 16,659 4,266 73,930
63,858 58,230 17,911 (1,765) (10,519)
482,890 299,037 37,397 121,748 24,707
Source: Company, ENAM estimates ; FY08E & FY09E: Tata Steel & Corus consolidated
17
Annexure
18
Annexure #1: Tax inefficiencies at Tata Steel Asia (example) (USD bn)
Tata (India) (Asia) (a) (b)
Tata UK (conso) c=(d+e)
Corus Netherland (d)
UK (e)
Tata (India)+Tata Note (Asia)+Tata UK (Conso) (a+b+c)
PBDIT
1.9
0.2
2.6
2.0
0.5
4.5 Tata Asia would receive dividend and hence elimited from consolidation
Interest
0.1
0.2
0.5
0.5
0.1
Depreciation
0.2
-
0.8
0.6
0.2
0.8 Cash outflow, line by line addition ( does not include the interest on bridge debt funding) 1.0
PBT
1.7
(0.0)
1.2
1.0
0.2
2.7
Tax
0.5
-
0.3
0.3
-
0.8
PAT
1.1
(0.0)
1.0
0.8
0.2
2.1
25%
0%
30%
6.1
0.8
Assumptions: Dividend payout (%)
25%
Dividend Tax rate
0.2 33%
20%
21%
Equity
4.8
7.5
Quasi Debt
2.7
Funding (USD bn)
Debt
0.5
Total
7.0 7.5
14.5
Source: Company, ENAM Research
19
Annexure #2: Tata Steel - Indian operations Iron making
Rolling
Steel making Casters
Cold Rolled Sheet
Slab Cold Mill
Coke Oven Batteries
Galv Sheet Hot Strip Mill
Oxygen Furnaces
Mill Blast Furnaces
Wire Rods
Billet Casters
Sinter plant
Rebar Mill
Billets
Indian mining operations
Iron Ore
Mines are are located located in in the the states states of of Mines Jharkhand and Orissa Jharkhand and Orissa Approximate distance distance of of 150 150 Approximate kms kms
Tata Steel (India)
Beneficiation plants plants Beneficiation Crushing & & Crushing washing washing
Subsidiaries
Coal
Two collieries collieries in in West West Bokaro Bokaro Two and Jharia Jharia (Jharkhand) (Jharkhand) and Coal mines mines are are ~150 ~150 kms kms away away Coal
Washeries Washeries (beneficiation plant) plant) (beneficiation Dense Media Dense Media Cyclone process process Cyclone
Manganese Chrome/ Dolomite
Own chrome, chrome, manganese manganese mines mines Own and Dolomite Dolomite quarries quarries in in Orissa Orissa and
N.A N.A
Tata Refractories (Refractories) Jamshedpur utilities TM International (Logistics) Indian Steel & Wire Hooghly Met Coke
Overseas Subs/Assoc.
Associates
Tata Metaliks Ltd. (Pig iron) Tata Sponge Iron Ltd. Tata Ryerson Ltd. Tinplate Co. of India. TAYO Rolls Ltd. TRF Ltd. Dhamra Port
NAT Steel Asia Bangla Steel & Minining Co. Millennium Steel
Source: Company, Note Strategic holding in Tata Motors, Tata Power, Tata Tele-services
20
Annexure #3: Tata Steel-Cost competitive Indian operations
Locational advantages
Labour Ferrous raw material
India map
Pictorial map
400
Germany Italy France
Japan
South Korea
(US$/t)
USA
400 350 300 250 200 150 100 50 0
India Ukraine Brazil Taiwan
Captive iron ore mines Captive minerals – coal, manganese, dolomite etc. Associate firms producing necessary inputs – metallics and ferro alloys
Russia
China
Hot metal: Cost curve
 Globally cost competitive steel player
Energy & Reductions Others
HRC: Cost break-up (USD/tonne)
300
247 28
Jharkhand
200 West Bengal
138
100 0
Chattisgarh
Tata
Orissa BAY OF BENGAL
67 14
Iron ore
Coal/Coke
Processing and other inputs
Personnel
Source: ENAM Research
21
Annexure #4: Corus EBITDA Trend 1,400
Steel Business: Half yearly / Quarterly EBITDA (USD mn)
1,200 1,000 800 600 400 200 0 (200)
(USD /Ton)
1Q 2006
2Q 2006 3Q 2006
2Q 2007
1Q 2007
4Q 2006
3Q 2006
2Q 2006
1H 2003
2H 2003
275
294
496
555
499
390
417
548
545
505
543
560
Iron Ore
21
23
23
23
30
38
38
45
45
45
45
48
Coking Coal
44
44
53
53
125
125
115
115
115
115
98
98
HRC steel Price
1H 2004 2H 2004 1H 2005 2H 2005
1Q 2006
2H 2005
1H 2005
2H 2004
1H 2004
2H 2003
1H 2003
(400)
4Q 2006 1Q 2007 2Q 2007
Source: Corus, ENAM Research, Note: HRC price is provided for analyzing the trend. It does not reflect the actual realization .
22
CONFLICT OF INTEREST DISCLOSURE We, at ENAM, are committed to providing the most honest and transparent advice to our clients. However, given the nature of the capital markets, from time to time we are faced with situations that could give rise to potential conflict of interest. In order to provide complete transparency to our clients, before we make any recommendations, we are committed to making a disclosure of our interest and any potential conflict IN ADVANCE so that the interests of our clients are safe- guarded at all times. In light of this policy, we have instituted what we believe to be the most comprehensive disclosure policy among leading investment banks/brokerages in the world so that our clients may make an informed judgment about our recommendations. The following disclosures are intended to keep you informed before you make any decision- in addition, we will be happy to provide information in response to specific queries that our clients may seek from us. Disclosure of interest statement (As of August 20, 2007) 1. Analyst ownership of the stock 2. Firm ownership of the stock 3. Directors ownership of the stock 4. Investment Banking mandate 5. Broking relationship
Yes No No No No
We are committed to providing completely independent and transparent recommendations to help our clients reach a better decision.
This document is provided for assistance only and is not intended to be and must not alone be taken as the basis for an investment decision. Nothing in this document should be construed as investment or financial advice, and nothing in this document should be construed as an advice to buy or sell or solicitation to buy or sell the securities of companies referred to in this document. The intent of this document is not in recommendary nature Each recipient of this document should make such investigations as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in this document (including the merits and risks involved), and should consult its own advisors to determine the merits and risks of such an investment. The investment discussed or views expressed may not be suitable for all investors Enam Securities Private Limited has not independently verified all the information given in this document. Accordingly, no representation or warranty, express or implied, is made as to the accuracy, completeness or fairness of the information and opinions contained in this document The Disclosures of Interest Statement incorporated in this document is provided solely to enhance the transparency and should not be treated as endorsement of the views expressed in the report. This information is subject to change without any prior notice. The Company reserves the right to make modifications and alternations to this statement as may be required from time to time without any prior approval Enam securities Private Limited, its affiliates, their directors and the employees may from time to time, effect or have effected an own account transaction in, or deal as principal or agent in or for the securities mentioned in this document. They may perform or seek to perform investment banking or other services for, or solicit investment banking or other business from, any company referred to in this report. Each of these entities functions as a separate, distinct and independent of each other. The recipient should take this into account before interpreting the document This report has been prepared on the basis of information, which is already available in publicly accessible media or developed through analysis of ENAM Securities Private Limited. The views expressed are those of analyst and the Company may or may not subscribe to all the views expressed therein This document is being supplied to you solely for your information and may not be reproduced, redistributed or passed on, directly or indirectly, to any other person or published, copied, in whole or in part, for any purpose. Neither this document nor any copy of it may be taken or transmitted into the United State (to U.S.Persons), Canada, or Japan or distributed, directly or indirectly, in the United States or Canada or distributed or redistributed in Japan or to any resident thereof. The distribution of this document in other jurisdictions may be restricted by law, and persons into whose possession this document comes should inform themselves about, and observe, any such restrictions Neither the Firm, not its directors, employees, agents or representatives shall be liable for any damages whether direct or indirect, incidental, special or consequential including lost revenue or lost profits that may arise from or in connection with the use of the information. Copyright in this document vests exclusively with ENAM Securities Private Limited.
23
Tata Steel
: 901mn : Rs 420bn : Rs.731/ Rs.399 : 4.4mn shares : TATA IN : TISC.BO
* Fully diluted equity ^ Mkt Cap based on current equity
Relative to Sector:
Shareholding (%)Jun-07 QoQ chg Promoters FIIs MFs / UTI Banks / FIs Others
: : : : :
33.8 22.7 2.1 15.6 25.8
Rs 690 Target Price: Rs 657
Neutral
Potential Upside: -5%
3.3 5.2 (1.1) (3.0) (4.4)
Relative Performance 200 150
Short term challenges before long term gain
100 50 Jun-06
Dec-06
Sensex
Jun-07 Tata Steel
Source: ENAM Research, Bloomberg
Financial summary Sales (Rs mn)
Y/E March 2006 2007 2008E 2009E
151,394 175,520 1,185,605 1,185,621
PAT (Rs mn) 34,177 42,647 65,770 76,577
Cons. EPS* (Rs.) 86.2 92.4
EPS (Rs.)
Change (YoY %)
37.9 47.3 73.0 85.0
0.26 25 54 16
P/E (x)
D/E (x)
14.1 9.5 9.4 8.1
0.3 0.7 1.8 1.6
RoE (%) 41.8 36.5 22.1 24.8
RoCE (%) 49.2 36.4 17.4 18.4
EV/EBITDA (x)
DPS (Rs)
4.7 3.1 5.4 5.4
14.8 14.8 14.8 14.8
Source: *Consensus broker estimates, Company, ENAM estimates on fully diluted equity. Note:- FY08 & FY09 estimates are on Tata + Corus consolidated basis. .
Jagdishwar Toppo
[email protected] (+91 22 6754 7605)
Associate: Ravindra Deshpande [email protected]
August 31, 2007 1
Table of contents Slide No. Â Executive Summary
3
 Short term challenges
5
 Long term outlook
8
 Industry outlook
12
 Financials & Valuations
15
 Annexure
18
2
Executive Summary  Milestones in the offing…
Key milestones
Equity raising and capacity expansion are the key to future success of Tata Steel
FY11
 … but not without short-term financial challenges:
Higher interest costs on bridge debt financing Tax inefficiencies for one of the SPVs (Tata Steel Asia)
 Thus, sustainable success hinges on:
FY10
Improving margin by enhancing integrated operations in India Corus synergy gains/ reducing the high operating leverage (See annexure 4)
FY09 FY08
High demand growth from the BRICs region Cost pressures to support steel prices Standalone players such as Corus are vulnerable
 Valuations:
Re-rating depends on completion of key milestones Key risks include financial leverage and low operating margin Maintain sector Neutral rating
Synergies gain & 3mnt Brownfield expansion
2 mnt Brownfield Capacity addition
Equity Raising
SPV Structure SPV Structure
 Sector outlook remains favourable
Green field expansion
Tata Steel (India)
Additional interest
Tax efficiency of borrowing
3bn equity yet to be raised
High
100% Tata Steel Asia Holdings Pte Ltd
Low
100% Tata Steel UK Ltd 100%
High
Corus Group Plc Source: Company, ENAM Research
3
Comparative valuations & Sensitivity Comparative Valuations Company
M Cap (USD mn)
Steel Capacity (mn tonnes)
D/E (x)
ROE (%) CY07/ FY08
P/E (x) CY07E/ CY08E/ FY08E FY09E
EV/EBITDA (x) CY07E/ CY08E/ FY08E FY09E
EV/Tonne Remark (USD)
Arcelor Mittal
90,331
117.2
0.6
19.3
9.8
8.8
6.7
6.3
1,052
No. 1 in the world
Nippon Steel Corp
47,193
32.7
0.6
17.4
15.8
14.0
8.2
8.1
1,858
No. 2 in the world
POSCO
47,681
30.1
0.2
16.5
11.0
10.3
7.2
6.8
1,803
No. 4 in the world
Tata Steel Ltd
8,631
23.3
1.8
22.1
9.4
8.1
5.4
5.4
1,020
No. 5 in the world
JSW Steel Ltd
2,184
4.1
1.3
24.7
7.2
6.1
6.0
5.1
1,280
Emerging No.2 in India
14,666
13.5
0.1
36.5
9.6
8.7
5.0
4.5
1,038
Largest player in India
SAIL
Source: Bloomberg, World Steel (IISI), Company, ENAM Research
Sensitivity Analysis EPS FY09E (Rs /share)
Cost of Iron Ore Coal Cost Less USD 40 Less USD 20 Base Case Plus USD 20 Plus USD 40
Less USD 20
Less USD 10
Base Case
Plus USD 10
Plus USD 20
116 109 101 93 85
108 101 93 85 77
100 93 85 77 69
92 85 77 69 61
84 77 69 61 53
Average realization (USD/MT) EPS FY09 (Rs/ share)
1,130
1,140
1,150
1,160
1,170
69
77
85
93
101
Source: Company, ENAM Research
4
Short term challenges
5
Key milestones & Valuation drivers  Large milestones
Financing Operations
FY11
 Valuations dependent on:
FY10
Successful execution
FY09
Greenfield expansion
Synergies gain & 3mn tonnes brownfield expansion
2 mn tonnes brownfield Capacity addition Valuation drivers
FY08
FY07
Corus Acquisition
FY08
Equity Raising Valuation Driver Valuation Dampener
Equity raising
Short term interest/ Tax
FY09
FY10
Volume/ Brownfield expansion
Synergy gain volume expansion
High financial Leverage
High operating leverage (see
annexure 4)
Re-rating would depend on equity raising & integrated brownfield expansion 6
Higher interest cost & low tax efficiency Funding requirement
(USD bn)
Already raised
100% Tata Steel Asia Holdings Pte Ltd 100% Tata Steel UK Ltd 100% Corus Group Plc
Tata Steel Equity
Total Equity – USD7.5bn
Debt
Right Issue Equity/ Quasi Equity (a)
Foreign Equity Offering (b)
a+b
1.3
0.5
2.6
0.4
3.0
4.8
Tata Steel Asia Quasi Equity
2.7
Corus NonRecourse Financing
6.1
6.1
Existing debt of Corus
0.8
0.8
Total EV
Short Term debt financing
Own cash
SPV Structure Tata Steel (India)
Yet to be raised
2.7
High
Overall lower/ higher effective tax rate (USD bn)
(INR bn)
FY08 (9 months)
3.0
94
Additional interest (nine months) @7%
0.2
7
Pre Tax profits (Consensus PBT)
-
80
As a %age of Consensus Pre Tax profits
-
8%
Source: Company, ENAM Research
High
Low
14.5
Short Term Bridge Debt Financing
Tax efficiency of borrowing
Consensus effective tax rate = 21.6%
(See annexure #1)
Additional interest for FY08 @ USD 0.2bn = 8% of consensus pre tax profit 7
Long term outlook
8
Strategy: Cost leadership + Differentiation Steel processing & Distribution Value added steel
Product
Cost leadership + Differentiation
Steel processing
Generic Strategy Differentiation (Customer Focus)
Technology intensive products India
South Asia
9 Technology Europe
9 New market/ Geographies
Value added products in India
9 New products/ segments Cost leadership (Global cost competitiveness) Generic strategy
Coking coal/ Gas
Raw Material
Iron & Steel making
Iron ore
Sizeable (one location) operation
9 Enhance scale 9 Access to cheap resources
Australia, Bangladesh? India
Value Value Chain chain
Source: ENAM Research
Sizeable Indian operation (3 locations)
FY07
9 Operational
Iran?
FY15
Time Geography
Strategic focus - integrated global expansion
9
Incremental EBITDA of USD 1bn EBITDA
Tata steel standalone
Corus CY06
Tata + Corus Integration Gain Long term
Scale benefit Output at Corus facilities to go up 400
0.6 0.4
EBITDA (USD bn)
Tata + Corus: Integration Gain EBITDA = USD 1.0 bn
(USD mn)
Technology transfer gain Tata Steel to gain from auto grade tech steel
Additional EBITDA USD 1 bn
Corus internal cost savings Restoring success initiative
Procurement savings Iron Ore
1.4
Ferro Alloy
600 1.7
Scrap replacement Corus: Scrap consumption to be replaced by Pig iron from Tata Steel Group Co Scrap consumption Nat Steel Scrap consumption sourced from Corus
Consumables Consumables saving
Source: Company, ENAM Research
Successful execution holds the key to synergies 10
Milestone: Integrated brownfield expansion 40 35
Tata Steel: Organic volume growth (mn tonnes)
34 6
30 25 20
Corus
5
18
Orissa
Brownfield expansion
15 10
3
2
Jamshedpur
5
Resource tieup
Steel Size (mn ton) Iron Ore Coal EBITDA Margin (%)
2010 +
2010
2008
2007
2007
0
Tata Steel Standalone
Corus
Tata+ Corus
Tata+ Corus after Brownfield Expansion (Tata Steel)
5
18
23
28%
100%
0%
20%
35%
60%
0%
15%
21%
40%+
8%+
14%+
20%+
Source: ENAM Research
Low margin Corus could be a drag. Key is to raise overall EBITDA margin 11
Industry outlook
12
Steel prices could rule firm 300 200 100 2007
2006
2005
2004
Incr. Demand
CIS HR Spot Price (RHS)
Steel price v/s capacity utilization 100%
(USD/ MT)
600 500
80%
400
60%
300
40%
200
20%
100
Utilisation (LHS)
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
0 1997
0% 1996
 We believe higher utilization level would keep steel prices in the new band of USD550-620/ tonne levels in the medium term
2003
2002
2001
2000
1999
1998
0
1995
 Cost pressures - iron ore, coal and freight straining supply (See the next slide)
500 400
Incr.Capacity
 Industry consolidation and cutbacks are the key price drivers
600
(USD/MT)
(mn tonnes)
1997
 Large Chinese capacity addition to replace old capacities and also for local consumptions
120 100 80 60 40 20 0 (20) (40)
1996
 Robust demand growth, driven by strong consumption in China and other EMs
Demand supply gap v/s pricing
1995
 China (~80% incremental demand /supply) remains a critical driver
CIS HR Spot Price (RHS)
Source: ENAM Research
13
Cost pressure set to increase Â
Cost pressure - iron ore, coal and freight straining supply
Â
Iron ore - Spot iron of prices currently 50% higher than current contract prices. Expected to rise significantly next year
Global coking coal price: 140
(USD/Tonne)
120 100 80
Japan
South Korea
(US$/t)
USA
40 20 2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
0
Cost of inputs: Iron ore-contract price FOB 60
(USD/ Tonne)
50 40 30 20 10 2007
2006
2005
Energy & Reductions Others
2004
Labour Ferrous raw material
2003
0 2002
400 350 300 250 200 150 100 50 0
China
Hot metal: Cost curve
Germany Italy France
HRC cost @440$/tonnes = Hot metal cost @320+ Processing cost@ 120
60
1980
20% of the world capacity will have variable cost in excess of USD 440 per tonne
India Ukraine Brazil Taiwan
Â
Coking coal – prices are expected to move higher next year
Russia
Â
Source: ENAM Research
14
Financials & Valuations
15
Tata Steel: Financials Income statement Y/E March
(Rs mn) 2006
2007
2008E
2009E
Net sales Other operating income Total income
149,101 2,293 151,394
173,216 2,304 175,520
1,183,278 1,183,224 2,327 2,397 1,185,605 1,185,621
Cost of goods sold Contribution (%) Advt/Sales/Distrn O/H
73,120
85,743
895,716
873,400
53
53
24
26
19,487
20,045
107,675
119,810
Operating Profit Other income
58,787 2,161
69,733 3,242
182,214 4,891
192,411 4,723
PBIDT Depreciation Interest Other pretax Pre-tax profit Tax provision (-) Minority Interests Associates Adjusted PAT E/o income / (Expense)
60,948 7,751 1,684 0 51,513 17,336 0 0 34,177 887
72,974 8,193 1,739 0 63,042 20,395 0 0 42,647 (426)
187,105 43,199 44,770 0 99,137 33,367 0 0 65,770 0
197,134 44,938 36,191 0 116,004 39,427 0 0 76,577 0
Reported PAT
35,064
42,222
65,770
76,577
Key ratios Y/E March
(%) 2006
2007
2008E
2009E
4.8
16.2
583.1
(0.0)
39.4 (0.8) 48.3 12.9 5.0 6.4
40.3 18.6 48.9 11.4 5.1 2.9
15.4 161.3 75.5 9.1 4.8 14.3
16.3 5.6 73.7 10.1 4.8 7.0
0.0 1.0
0.0 1.1
0.1 2.2
0.1 1.3
(26.9) 49.2 0.3 33.7 41.8 23.4
65.6 36.4 0.7 32.4 36.5 20.4
20.5 17.4 1.8 33.7 22.1 20.3
73.4 18.4 1.6 34.0 24.8 17.4
37.9 0.3 75.7 14.8
47.3 24.8 87.6 14.8
73.0 54.2 121.0 14.8
85.0 16.4 134.9 14.8
Sales growth OPM Oper. profit growth COGS / Net sales Overheads/Net sales Depreciation / G. block Effective interest rate Net wkg.cap / Net sales Net sales / Gr block (x) Incremental RoCE RoCE Debt / equity (x) Effective tax rate RoE Payout ratio (Div/NP) EPS (Rs.) EPS Growth CEPS (Rs.) DPS (Rs.)
Source: Company, ENAM estimates ; FY08E & FY09E: Tata Steel & Corus consolidated
16
Tata Steel: Financials Balance sheet Y/E March
(Rs mn) 2006
2007
2008E
2009E
Total assets Gross block Net fixed assets CWIP Investments Wkg. cap. (excl cash) Cash / Bank balance Others/Def tax assets
143,639 154,074 87,075 11,577 20,266 1,403 2,884 20,433
253,950 160,295 85,431 24,974 36,925 5,669 76,814 24,137
821,893 900,012 316,244 50,000 74,322 127,417 87,415 166,495
822,499 934,264 329,536 50,000 92,234 125,652 80,592 144,485
Capital employed Equity capital Reserves Borrowings Others
143,639 5,537 89,484 25,162 23,457
253,950 5,807 133,130 96,453 18,560
821,893 9,009 288,331 531,096 (6,543)
822,499 9,009 312,193 506,636 (5,339)
Cash flow
(Rs mn)
Y/E March
2006
Sources Cash profit (-) Dividends Retained earnings Issue of equity Borrowings Others
21,259 43,204 8,204 34,999 0 (2,236) (11,505)
Applications Capital expenditure Investments Net current assets Change in cash
21,259 15,281 5,527 34 417
2007
2008E
2009E
114,801 482,890 48,760 103,798 8,606 13,352 40,154 90,446 13,932 150,571 71,292 434,643 (10,577) (192,770)
63,858 121,764 13,352 108,412 (16) (24,460) (20,078)
114,801 19,946 16,659 4,266 73,930
63,858 58,230 17,911 (1,765) (10,519)
482,890 299,037 37,397 121,748 24,707
Source: Company, ENAM estimates ; FY08E & FY09E: Tata Steel & Corus consolidated
17
Annexure
18
Annexure #1: Tax inefficiencies at Tata Steel Asia (example) (USD bn)
Tata (India) (Asia) (a) (b)
Tata UK (conso) c=(d+e)
Corus Netherland (d)
UK (e)
Tata (India)+Tata Note (Asia)+Tata UK (Conso) (a+b+c)
PBDIT
1.9
0.2
2.6
2.0
0.5
4.5 Tata Asia would receive dividend and hence elimited from consolidation
Interest
0.1
0.2
0.5
0.5
0.1
Depreciation
0.2
-
0.8
0.6
0.2
0.8 Cash outflow, line by line addition ( does not include the interest on bridge debt funding) 1.0
PBT
1.7
(0.0)
1.2
1.0
0.2
2.7
Tax
0.5
-
0.3
0.3
-
0.8
PAT
1.1
(0.0)
1.0
0.8
0.2
2.1
25%
0%
30%
6.1
0.8
Assumptions: Dividend payout (%)
25%
Dividend Tax rate
0.2 33%
20%
21%
Equity
4.8
7.5
Quasi Debt
2.7
Funding (USD bn)
Debt
0.5
Total
7.0 7.5
14.5
Source: Company, ENAM Research
19
Annexure #2: Tata Steel - Indian operations Iron making
Rolling
Steel making Casters
Cold Rolled Sheet
Slab Cold Mill
Coke Oven Batteries
Galv Sheet Hot Strip Mill
Oxygen Furnaces
Mill Blast Furnaces
Wire Rods
Billet Casters
Sinter plant
Rebar Mill
Billets
Indian mining operations
Iron Ore
Mines are are located located in in the the states states of of Mines Jharkhand and Orissa Jharkhand and Orissa Approximate distance distance of of 150 150 Approximate kms kms
Tata Steel (India)
Beneficiation plants plants Beneficiation Crushing & & Crushing washing washing
Subsidiaries
Coal
Two collieries collieries in in West West Bokaro Bokaro Two and Jharia Jharia (Jharkhand) (Jharkhand) and Coal mines mines are are ~150 ~150 kms kms away away Coal
Washeries Washeries (beneficiation plant) plant) (beneficiation Dense Media Dense Media Cyclone process process Cyclone
Manganese Chrome/ Dolomite
Own chrome, chrome, manganese manganese mines mines Own and Dolomite Dolomite quarries quarries in in Orissa Orissa and
N.A N.A
Tata Refractories (Refractories) Jamshedpur utilities TM International (Logistics) Indian Steel & Wire Hooghly Met Coke
Overseas Subs/Assoc.
Associates
Tata Metaliks Ltd. (Pig iron) Tata Sponge Iron Ltd. Tata Ryerson Ltd. Tinplate Co. of India. TAYO Rolls Ltd. TRF Ltd. Dhamra Port
NAT Steel Asia Bangla Steel & Minining Co. Millennium Steel
Source: Company, Note Strategic holding in Tata Motors, Tata Power, Tata Tele-services
20
Annexure #3: Tata Steel-Cost competitive Indian operations
Locational advantages
Labour Ferrous raw material
India map
Pictorial map
400
Germany Italy France
Japan
South Korea
(US$/t)
USA
400 350 300 250 200 150 100 50 0
India Ukraine Brazil Taiwan
Captive iron ore mines Captive minerals – coal, manganese, dolomite etc. Associate firms producing necessary inputs – metallics and ferro alloys
Russia
China
Hot metal: Cost curve
 Globally cost competitive steel player
Energy & Reductions Others
HRC: Cost break-up (USD/tonne)
300
247 28
Jharkhand
200 West Bengal
138
100 0
Chattisgarh
Tata
Orissa BAY OF BENGAL
67 14
Iron ore
Coal/Coke
Processing and other inputs
Personnel
Source: ENAM Research
21
Annexure #4: Corus EBITDA Trend 1,400
Steel Business: Half yearly / Quarterly EBITDA (USD mn)
1,200 1,000 800 600 400 200 0 (200)
(USD /Ton)
1Q 2006
2Q 2006 3Q 2006
2Q 2007
1Q 2007
4Q 2006
3Q 2006
2Q 2006
1H 2003
2H 2003
275
294
496
555
499
390
417
548
545
505
543
560
Iron Ore
21
23
23
23
30
38
38
45
45
45
45
48
Coking Coal
44
44
53
53
125
125
115
115
115
115
98
98
HRC steel Price
1H 2004 2H 2004 1H 2005 2H 2005
1Q 2006
2H 2005
1H 2005
2H 2004
1H 2004
2H 2003
1H 2003
(400)
4Q 2006 1Q 2007 2Q 2007
Source: Corus, ENAM Research, Note: HRC price is provided for analyzing the trend. It does not reflect the actual realization .
22
CONFLICT OF INTEREST DISCLOSURE We, at ENAM, are committed to providing the most honest and transparent advice to our clients. However, given the nature of the capital markets, from time to time we are faced with situations that could give rise to potential conflict of interest. In order to provide complete transparency to our clients, before we make any recommendations, we are committed to making a disclosure of our interest and any potential conflict IN ADVANCE so that the interests of our clients are safe- guarded at all times. In light of this policy, we have instituted what we believe to be the most comprehensive disclosure policy among leading investment banks/brokerages in the world so that our clients may make an informed judgment about our recommendations. The following disclosures are intended to keep you informed before you make any decision- in addition, we will be happy to provide information in response to specific queries that our clients may seek from us. Disclosure of interest statement (As of August 20, 2007) 1. Analyst ownership of the stock 2. Firm ownership of the stock 3. Directors ownership of the stock 4. Investment Banking mandate 5. Broking relationship
Yes No No No No
We are committed to providing completely independent and transparent recommendations to help our clients reach a better decision.
This document is provided for assistance only and is not intended to be and must not alone be taken as the basis for an investment decision. Nothing in this document should be construed as investment or financial advice, and nothing in this document should be construed as an advice to buy or sell or solicitation to buy or sell the securities of companies referred to in this document. The intent of this document is not in recommendary nature Each recipient of this document should make such investigations as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in this document (including the merits and risks involved), and should consult its own advisors to determine the merits and risks of such an investment. The investment discussed or views expressed may not be suitable for all investors Enam Securities Private Limited has not independently verified all the information given in this document. Accordingly, no representation or warranty, express or implied, is made as to the accuracy, completeness or fairness of the information and opinions contained in this document The Disclosures of Interest Statement incorporated in this document is provided solely to enhance the transparency and should not be treated as endorsement of the views expressed in the report. This information is subject to change without any prior notice. The Company reserves the right to make modifications and alternations to this statement as may be required from time to time without any prior approval Enam securities Private Limited, its affiliates, their directors and the employees may from time to time, effect or have effected an own account transaction in, or deal as principal or agent in or for the securities mentioned in this document. They may perform or seek to perform investment banking or other services for, or solicit investment banking or other business from, any company referred to in this report. Each of these entities functions as a separate, distinct and independent of each other. The recipient should take this into account before interpreting the document This report has been prepared on the basis of information, which is already available in publicly accessible media or developed through analysis of ENAM Securities Private Limited. The views expressed are those of analyst and the Company may or may not subscribe to all the views expressed therein This document is being supplied to you solely for your information and may not be reproduced, redistributed or passed on, directly or indirectly, to any other person or published, copied, in whole or in part, for any purpose. Neither this document nor any copy of it may be taken or transmitted into the United State (to U.S.Persons), Canada, or Japan or distributed, directly or indirectly, in the United States or Canada or distributed or redistributed in Japan or to any resident thereof. The distribution of this document in other jurisdictions may be restricted by law, and persons into whose possession this document comes should inform themselves about, and observe, any such restrictions Neither the Firm, not its directors, employees, agents or representatives shall be liable for any damages whether direct or indirect, incidental, special or consequential including lost revenue or lost profits that may arise from or in connection with the use of the information. Copyright in this document vests exclusively with ENAM Securities Private Limited.
23
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