For Q1FY09, Tata Steel posted a y-o-y topline growth of 39.6% to Rs43,508 crore (Rs31,162 crore) mainly on account of the delivery growth of 11.5% and strong steel prices in the European markets.
Blended realizations grew 25.2% y-o-y to Rs50,887 per tonne (Rs40,629 per tonne). Corus, which contributed the most to the consolidated revenues of the group, announced price hikes several times during the year to pass on the incremental cost burden to customers on account of the high iron ore and coking coal prices.
Also, an improved product mix of the group helped the company achieve better realizations and boost its topline.
The domestic steel players have been struggling to maintain their Margins, due to intervention by the government to control prices.
Tata Steel has, however, been an exception on account of being the most efficient player and being the most integrated player in both iron ore and coking coal compared to its peers. However, correction in the global steel prices remains as a major risk for Corus’s profitability.
Outlook and valuation
We upgrade our earnings estimates for FY09 by around 20% on account of the better-than-expected Q1FY09 results, better realization from Corus and lower Tax rate of 20-22% guided by the management.
We have marginally upgraded the earnings estimates for FY2010 by 1.4%. At the current price of Rs600, Tata Steel is trading at a P/E of 5.2x and EV/EBIDTA of 4.2x FY2010E consolidated earnings.
We believe that the stock is quoting at attractive valuations considering the better-than-expected performance by Corus, higher synergistic benefits ($600 million, earlier $450 million), strong prices in the European markets, diversified markets and scale of operations.
However, the biggest risks to our assumptions are correction in the global prices and consequently Corus’ ability to pass on additional costs to consumers in the medium term and no change in the government’s restrictive attitude towards steel prices. We maintain a BUY on the stock, with a target price of Rs875.