Tata Steel reported PAT of Rs7.9 billion for the recently concluded quarter, which was below our expectation of Rs8.8 billion.
Net revenue declined by 9%, primarily on account of a sharp fall of ~57% in the revenue of Ferro alloys and mineral division (FAMD, resulted in ~88% of the overall fall) and rest of the decline was contributed by the steel business since volume growth of 22% was not enough to contain the 20% fall in realisations.
EBITDA declined by 43% to Rs16.8 billion due to a decline of 33% and 97% in the earnings of steel (82% share in the EBITDA) and FAMD businesses (17% share in EBITDA), respectively.
The performance on EBITDA level was well below our expectation of Rs17.9 billion. Blended EBITDA per tonne of steel volume declined by 54% to Rs11,854. However, on q-o-q basis, it is up by 53%.
Benefited by higher volume (our expectation of 21% volume growth), improved realisations and reduced coking coal from Q2FY10 onwards, earnings for the rest of the year are likely to decline by 2% against 53% in Q1FY10 and almost identical decline in Q2FY10.
At the CMP, the stock trades at P/E of 11.8x and 8.7x FY10E and FY11E, respectively, while on EV/EBITDA, it trades at 8.1x and 6.7x FY10E and FY11E, respectively.
Tata Steel looks expensive given the uncertain outlook on the recovery in its Europe market and poor returns on a long term basis. We maintain REDUCE rating.