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St turns bullish on Tata Steel as India ops recover

Friday, 16 May 2014 - 7:45am IST | Place: Mumbai | Agency: DNA
Scrip hits 2-week high, brokerages cautious about Europe ops

Tata Steel shares hit a two-year high on Thursday at Rs 468, riding on strong fourth-quarter earnings that surpassed market expectations.

Significant turnaround in European operations and robust operational performance of domestic business led most brokerages to upgrade their price target for the scrip, albeit some still remained sceptical over further upside.

JPMorgan remains 'overweight' on the stock, with a revised target price of Rs 620 per share. It feels Tata Europe will benefit from spread and volume expansion. The stock is top pick of Barclays with an upgraded target of Rs 501 per share from Rs 466 per share. The firm has also upgraded fiscal 2015 earnings per share estimates 7.3%. Emkay Global Financial upgraded the stock to 'accumulate' from 'hold' and also increased the target price to Rs 492. Nirmal Bang Securities, too, increased its target price to Rs 400 from Rs 310, but retained 'sell' rating.

The Jamshedpur-based company posted a consolidated net profit of Rs 1,071.19 crore in the fourth quarter ended March as against a loss of Rs 6,668 crore in the year-ago period on the back of strong volumes in both Indian and European operations.

Most brokerages raised their Ebitda-per-tonne estimates for the steelmakers Indian operations, citing stellar realisation in fourth quarter. "We have upgraded our steel sales & margin estimates for its Indian division (standalone operations) for fiscal 2015. We have assumed steel sales of 9.2 million tonne (mt) and 9.5 mt in fiscal 2015 and 2016 respectively while Ebitda/tonne is expected at Rs 15,515/tonne and Rs 15,743/tonne, respectively, in the corresponding period," ICICI Direct said.

Motilal Oswal upgraded domestic Ebitda per tonne by $4 and volumes by 230,000 tonne for both fiscals 2015 and 2016, while Nirmal Bang Securities revised it by 7% for current and next fiscal.

Higher volumes due to complete ramp up of 2.9 mt new capacity in the last fiscal, restructuring of sales and marketing division, higher premiums on sale of specialised steel helped the company to improve margins in domestic operations. But Emkay Global Financial believes that maintaining Q4 Ebitda performance could be difficult for the company as the costs are likely to remain higher in the Kalinganagar project, which is likely to commission by end of this fiscal. "There was big improvement in India margin but it is unlikely to sustain," CLSA said.

Tata Steel's European operations have shown consistent recovery in last four quarter, which continued in the March quarter as the sales volume in the region rose nearly 28% sequentially to 4.1 mt.

Yet, most analysts were disappointed with Europe's operational performance as it Ebitda per tonne fell 25% sequentially due to lower realisation. On year-on-year basis, however, Europe operations have shown significant improvement.

"We believe that the scope of improvement in Europe is still there but is limited unless there is full fledged recovery in underlying demand. We have revised our Ebitda/ tonne estimate upwards to $40 for fiscal 2015 and we introduce fiscal 2016 Ebitda/ tonne estimate for European operation at $45," Emkay Global said.

European margins are likely to improve on lagged benefit of reduced raw material cost and stable steel prices.

Despite high-margin domestic operations and visible improvement in Europe and Southeast Asia operations, Tata Steel stock may not see much upside due to high debt burden.

Also, a hike in capital expenditure guidance by Tata Steel management for current and next fiscal did not augur well with analysts. The company spent Rs 16,500 crore in the last fiscal and indicated to spend a similar amount in this fiscal as well. Its debt is likely to peak in current fiscal but till then net-debt level of the company would be closely observed.

"Upside in the stock would be capped at Rs 500," Goutam Chakraborthi of Emkay said. Further improvement in stock is ruled out as it has already surged 32% over the past three months.


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