Tata Steel reported 3Q consolidated results that significantly beat market expectations, with Corus reporting positive earnings.
Net sales at Rs332 billion were up 4% y-o-y due to better pricing given old contracts. EBITDA at Rs28.6 billion was down 27% due to higher raw material costs and inventory write-downs. PAT stood at Rs8.1 billion, helped by lower taxes.
Tata Steel has already achieved 93% of our full-year EBITDA in the first nine months, while, due to lower interest charges due to prepayment of loans and lower taxes, the company has achieved Rs118.8 of EPS against our full-year estimate of Rs99.8.
Corus reported an EBITDA margin of $83/t, down from $172 in 2Q FY3/09, despite inventory write-downs and a 24% drop in volume q-o-q. Management’s early action and some hedging helped mitigate the adverse impact.
Outlook and valuation
Tata Steel is looking to maximise its production and sales from its low-cost Indian operations and has guided for 50% growth for 4Q FY3/09.
European operations will continue to operate at 60% capacity utilisation until June 2009 as inventory levels at a consumer level remain high.
The company is targeting £600 million of cost reduction in 2H FY3/09 at Corus. And it is also projecting £200 million of cost savings for FY3/10.This should help reduce the impact of margin compression, as lower steel prices start to feed in next quarter.
Tata Steel is a value stock trading at just 0.3x P/BV and should get re-rated once the concerns on its high gearing recede.
Its low cost operations in India give Tata Steel a strong foundation, while Corus provides the leverage to OUTPERFORM in case of an upturn in demand. Our 12-month price target is Rs430 based on a PER methodology.