Tata Steel: Worst Is Over ?

Q2FY16 result beats estimates helped by other income

223-210 might be good accumulation zone for 280-315 in the near term

CMP: 225

Buy around: 223-213-210

TGT: 245-262-280 (1-3M)
 

TGT: 300-315 & 350-388 (12-24M)

TSL< 205

Note: Consecutive closing below 205 for any reason, TS can fall up to 199-195, which is again a good buying zone with TSL<185. Sustain below 185, TS may further fall to 175-155 zone. For strength, TS needs to trade above 223-228 for an immediate target of 245 and above.

Some key takeaways & rationale:

Standalone Q2FY16 PAT at Rs.2523 cr against expectations of 2310; QOQ-1249; YOY-2476.

OP at Rs.1862 cr with OPM at 19.5% against estimate of 1655 with 18.8%.

Q2 EPS at 25.53 against QOQ-12.41 & YOY-25.04

Consolidated Q2FY16 PAT at Rs.1529 cr against consensus of 851; QOQ-763; YOY-1254.

Q2 consolidated EPS at 15.31 against QOQ-7.42 & YOY-12.46

OP at Rs.1830 cr down nearly 50% YOY with OPM at 6.2% (down by 4%).

Although as par company's release, OPM from operations before exceptional items & tax is around Rs.2349 cr against QOQ-1092 & YOY-1302.  

In Q2, other income of TS stood at around Rs.2938 cr against Rs.321 cr YOY. This OI includes gain of Rs.2808 cr on sale of quoted investments (Tata Motors & Titan). 

In September'15, TS sold around 3.80 lacs Tata Motors shares to Tata Sons for Rs.1250 cr through an off-market transactions @330 per share.

This other income and selling of quoted investments are already  known factors as par the company's strategy to sell non-core assets to prune its massive balance sheet debts (Rs.80903 cr as on Q2FY16).

In Q2, TS reduced its debt by Rs.2903 cr (pre-payment) and consolidated finance costs dropped by almost 15% (YOY).

TS is also actively considering complete sale of its UK long products div as a part of non-core/strategic asset sale, but finding a buyer could be difficult at this point of time.

TS's EU steel operations are being proved too costly and a consistent looser ever since it bought Corus in 2008 for $13 bn with huge funding. EU business loss is also over shadowing TS's smaller but more profitable India operation. 

Clearly, TS's EU operations hurt the company although there is some apparent silver lining in its domestic operations. EU operation was hurt by sharp deterioration in conditions there, specially in UK amid strong currency (GBP). Also there was sharp increase in imports from China/CIS/SAFTA countries amid their respective weaker currency, So, in that sense, TS may be a victim of global currency war & cross currency headwinds apart from overall depressed steel demand and excess supply.

UK is another country in G-6, which was supposed to lift off soon or after Fed. But yesterday's BOE statement is more dovish than the market thought and it seems that BOE will only act after the Fed move.

Thus, we may see downward pressure in GBP in the near term and that may also help TS to some extent.

Domestic operations was helped by better value added product mix, specially in automobiles steel sector. But relatively strong INR and cheap imports from China & other FTA countries like Japan & Korea are hurting India operations to some extent amid subdued manufacturing activity. Also rural demand was hurt for erratic monsoon & tepid rural wage growth this year. Overall slow demand is also neutralizing the impact of higher import duty for steel industry in India.

Looking ahead, the management of TS is hopeful that various reform policies undertaken by our Govt will manifest gradually in the underlying domestic steel demand over the next few years; i.e. they are also expecting overall economic recovery and infra boom by FY:17-18.

In India, "Smart City & Village, Affordable Housing for all" themes and expected rapid urbanization will certainly create more demands for steel and TS, being one of the major company, might be also benefited immensely. 

Kalinga Nagar plant of TS will commence shortly which should also help its more profitable domestic operations. The company's increasing focus on cost cutting and thrust on value added products should also help it in the days ahead.  

Analysts are concerned over near term recovery in EU operation amid tepid growth prospect there and continued cheap imports by China, which produces around 50% of the global steel production. Basically, its a "gloom & doom" situation for overall steel industry and specially for TS.

Although TS's India operations continue to be helped by its backward integration in sourcing its iron ore (100%) and coking coal (40%), the end benefit is somewhat reduced due to more lower cost of raw materials abroad amid subdued global commodity prices. Also mining cost in India has increased a lot recently due to various regulatory challenges and increased contribution to District Mineral Foundation.     

But, having said that, China and other global slow down fears may be bottoming out and we may see better demand/supply metrics in the days ahead and worst may be over for steel industry, including Tata Steel. For that, growth in China and other major parts of the world is necessary, so that China could find a place to dump its excess steel production apart from India.

Going by the time & price action on the scrip, the above sets of bad news might be discounted to a great extent as the  scrip already corrected by more than 50% in the last 16 months !!.

Now, technically, TS need to sustain above 223-233 zone, otherwise it can fall up to 210-195 area, from where fresh accumulation may be considered. 

As par BG metrics & current market parameters:

(standalone TTM & FWD EPS)

Present median valuation of Tata Steel may be around: 275 (FY:15/TTM)

Projected fair valuations might be around: 295-315-335 (FY:16-18/FWD)

SCRIP	EPS(TTM)	BV(Act)	P/E(AVG)	Low	High	Median	200-DEMA	10-DEMA
TATASTEEL	55.39	686.39	5	287.84	258.26	273.05	299.16	240.83

TATASTEEL

62.55

730.55

5

305.88

274.44

290.16

299.16

240.83

TATASTEEL

71.55

778.55

5

327.15

293.53

310.34

299.16

240.83

TATASTEEL

81.05

828.95

5

348.19

312.40

330.30

299.16

240.83

Analytical Charts: