We upgrade Tata Steel to ‘buy’ from ‘neutral’ and increase our SoTP-based fair value to R500 per share from R427 as we include the Kalinganagar equity contribution and investments. De-leveraging through sale of non-core assets could, in our view, provide a fillip to the stock.
We value the company’s India, Europe and SE Asia operations at 6.0x, 5.0x and 5.0x FY15e EV/Ebitda, respectively. With increasing visibility on the Kalinganagar expansion, we value capex incurred so far at the book value (i.e., R37 per share). We ascribe a 20% discount to investments, valuing them at R58 per share.
Tata Steel currently trades at an 11% discount to its historical five-year one-year forward EV/OP and we see value in the stock at these levels. Improving cost economics for non-integrated mills in Europe, higher UK/EU PMI, along with a spurt in EU steel production volumes (up 7.3% and 4.7% in January and February of 2014) offer a ray of hope.
Tax allowance for investments, doubling export finance to 3 billion British pound sterling and, importantly, a cap on carbon price support rate at 18 British pound sterling from 2016-17 to 2019-20 and compensation to energy intensive industries are key positives.
While carbon floor price cap is a positive, we see long-term concerns on carbon compliance along with steel overcapacity in the region. Our FY15 and FY16 Tata Steel Europe volumes stand at 13.8 mt and per tonne Ebitda at $45-48.
- Espirito Santo