Tata Steel to see improved profitability with stabilization of expansion, says Nomura
Moneylife Digital Team 15 February 2013

Indian steel demand has grown at a rate of 4%-5% for the last 12-18 months and has now started to reflect in the weakened pricing power of the companies, says Nomura Equity Research in its report on medium-term prospects for Tata Steel

Weak domestic steel demand growth in the last 12-18 months has resulted in Indian steel prices trading at a discount to import parity. While Nomura does not expect a significant improvement in operating environment in the near term, it expects Tata Steel to see improved profitability with stabilization of expansion. This is reflected in by Nomura Equity Research in its report on the medium-term prospects for Tata Steel.

 

Indian steel demand has grown at a rate of 4%-5% for the last 12-18 months and has now started to reflect in the weakened pricing power of the companies. While Indian steel prices used to be at a premium to import parity (until 6-8 months back), domestic steel prices are now at a discount of 1%-2% to import parity (current discounts are at 4%-5%).

 

Tata Steel should see a gradual improvement in the profitability of its Indian operations despite a challenging external environment driven: by (a) ramp-up of 2.9mtpa expansion; (b) production from coke oven battery; (c) residual benefits of lower coking coal prices and (d) commissioning of cold rolled mill in  H2FY14F, according to Nomura analysts.

 

At the same time, European operations of Tata Steel should also see EBITDA/tonne stabilizing at $30-35/tonne, driven by: (a) Port Talbot BF rebuilt (it will have better efficiency, lower fuel rate, etc) (b) marginal improvement in pricing outlook in Europe, and (c) lower raw material costs.

 

Weaker domestic steel demand has started to reflect in realization pressures. Nomura has lowered its FY14F and FY15F realization estimates for Tata Steel’s Indian operations by 1.2% and 1.8%, respectively. It has lowered its sales volume estimates to 8.7millon tonne in FY14F (from 9.1mt earlier and as per Tata Steel management’s guidance) and 9.3mt in FY15F (from 9.4mt earlier). As a result, Nomura’s FY14F and FY15F stand-alone EBITDA estimates are down 8% and 4.3%, respectively

 

Nomura estimates Tata Steel’s average realization premium to shrink to 10% in FY14F from 13.7% in FY12 and 11.5% in FY13F on account of both (a) discount of 1%-2% ascribed to domestic steel price in general and (b) deterioration in product mix. However, it expects premiums to again improve to 11.5% in FY15F as cold rolled mill would come on line and product mix in general would improve.  Nomura’s analysts maintain their ‘Buy’ recommendation for the company’s share.

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