The low-cost Indian operations remain the key foundation for earnings. We believe that our forecast for operating margin of $217/t and 14% volume growth from the recently commissioned 1.8mtpa facility remains on track and might even have some upside risk.
Subsidiary Corus is targeting £ 1 billion in cost reductions in FY3/10. However, conditions in Europe have remained very weak, with steel prices falling until the last reading. It appears that Europe may take longer to recover as compared with even the US.
Tata was looking to sell some of its non-core assets. Given the market conditions, not surprisingly, there are media reports that the agreement entered by Corus to sell the 75% stake in its Teeside facility may be under a bit of a threat.
Tata Steel’s initiatives for coking coal in Mozambique and iron ore in Canada and South Africa are expected to start having an impact from FY11, when the production starts from these facilities.
We are raising our target price to Rs295 based on the long-term average P/BV (adjusted for goodwill) of 1.1x.
We continue to believe that Tata Steel represents great value and a good long-term pick, but we believe that its European operation will take a while to recover.
Hence, the current rally in the stock may not have many catalysts left unless we see ‘V’-shaped recovery in the global economy.
We are downgrading the stock to NEUTRAL from Outperform while increasing the target price to Rs295 from Rs265.