BackIndia Infoline keeps BUY on Tata Sponge
India Infoline keeps BUY on Tata Sponge
Premium
During the recently concluded quarter, the lack of availability of steel scrap, used as a raw material for manufacturing steel through the blast furnace route continued. This pushed prices higher resulting into substitution of scrap with sponge iron.
Coking coal contract prices have increased 200% in FY09 leading to strong coke prices for the rest the year. With the rise in the demand for steel products and rising raw material prices for blast furnace, steel producers have started to use sponge iron as a raw material.
We expect the availability of steel scrap will not ease ahead; as a result sponge iron prices will remain firm in the next two years.
Investment plans
TSIL has plans to make considerable investments in Orissa. It plans to grow its sponge iron-making capacity to 0.8mtpa and its power generation capability to 63MW. It sources 70% of its coal requirement from Coal India and imports 30% on a spot basis.
The company had been jointly allocated a 120mn tons coal mine in Talcher, Orissa in 2006 and has 45% stake in the mine. Forest and environment clearance are in place while land acquisition for the same is under process.
Valuation
With capacity being added at the right time and raw material linkages already established, we believe TSIL should post strong revenue and profit growth over the next two years.
At the current price it trades at 3.4x and 3.3x FY09E and FY10E EPS of Rs65.9 and Rs67.8 respectively. We recommend BUY with a price target of Rs349, an upside of 54.5% over the next twelve months.
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