For FY08, Tata Steel’s net sales increased 12.2% y-o-y to Rs196.9 billion on account of higher realizations due to the rise in steel prices. In addition, EBITDA margin improved 203 bps y-o-y to 41.8% supported by lower freight and handling charge.
However, adjusted net profit increased by a moderate 5% to Rs45.4 billion in FY08. It was adversely affected by the exponential rise in interest expense due to the debt raised to fund the Corus acquisition.
Going forward, global steel demand is expected to grow at a healthy rate of 6.7% and 6.3% in FY09 and FY10, respectively. To cater to the rising demand, the company is rapidly expanding its capacities. It is on schedule to expand capacity at the Jamshedpur plant to 10 mt. Further, Corus is on track to add a total of 1.7 mtpa of capacity by FY10.
At the current market price of Rs698.95, the stock is trading at a forward EV/EBITDA of 5x and 4.1x for FY09E and FY10E, respectively. We believe that the stock is undervalued and hence reiterate our BUY rating with a target price of Rs840.