Stock Market Result Update on Tata Steel for 1QFY2012

Stock Market Result Update on Tata Steel for 1QFY2012 with a Buy recommendation and a Target Price of `614 (12 months).

Tata Steel reported robust top-line growth in 1QFY2012. However, the company’s profitability suffered on account of higher raw-material costs and subdued demand at its European operations. Nevertheless, we continue to maintain our positive stance on Tata Steel owing to its buoyant business outlook in its India operations mainly driven by higher sales volume in FY2013. We maintain our Buy view on the stock.

EBITDA/tonne decreases despite higher realisation: Despite higher realisation, EBITDA/tonne decreased by 3.1% and 1.2% yoy to US$442 and US$78 in Tata Steel India and Tata Steel Europe (TSE) operations, respectively, as increased realisation was offset by higher raw-material costs. Consolidated EBITDA decreased by 0.2% yoy to `4,423cr. Other income increased to `3,882cr, compared to `59cr in 1QFY2011. Other income included gains on sale of Tata Refractories, final settlement credit on sale of TCP and stake in Riversdale Mining Ltd. Adjusting for these exceptional items, adjusted net profit decreased by 23.0% yoy to  `1,459cr, significantly below our estimate of  `1,858cr. Reported net profit stood at `5,347cr, compared to `1,825cr in 1QFY2011.

Net debt declines on sale of strategic investments: The company’s net debt decreased to US$8.5bn as on June 30, 2011, compared to US$13.6bn as on March 31, 2011, due to cash generated from the sale of strategic investments.

Volumes decline at TSE: In Europe, deliveries decreased to 3.5mn tonnes in 1QFY2012, compared to 3.7mn tonnes in 1QFY2011. EBITDA/tonne for TSE stood at US$78 in 1QFY2012 compared to US$79 in 1QFY2011.