'Buy' Tata Steel shares as European ops drive earnings surprise, target price Rs 286: Deutsche Bank

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SummarySeeing some green shoots of recovery, says Deutsche Bank about Tata Steel.

Tata Steel shares: Recurring PAT (profit after tax) at Rs 6 bn (+1% y-o-y) came in significantly ahead of Dbe (Rs 2.7 bn) and consensus expectations (Rs 3 bn). Cyrus Mistry-led Tata Steel’s consolidated Ebitda (earnings before interest, taxes, depreciation and amortisation) at Rs 35.9 bn (+5.4% y-o-y, -12.2% q-o-q) came in 11% ahead of Dbe and 15% above consensus expectations. The variance is attributable primarily to a significantly better than expected performance in company’s European operations. Headline net profit was positively impacted on account Rs 4.15 bn of one off tax credit during the quarter on actuarial gain on pension fund and deferred tax adjustments in Netherlands.

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Performance review: Tata Steel’s Q1FY14 standalone Ebitda at Rs 28.3 bn (+2% y-o-y, -14% q-o-q) and PAT at Rs 13.56 bn (0% y-o-y, -32% q-o-q) came in line with DBe. While the blended steel realisations came in 2% below our expectations, the adverse impact was more than offset by higher than expected volumes at 2.01 mn tonnes. Ebitda/tonne declined by 2% q-o-q to Rs 14,136/tonne.

Outlook: The ramp up of the newly commissioned facilities at Jamshedpur is progressing well. While the steel price outlook in India remains subdued on a weak domestic environment, Tata Steel India should benefit from improved volumes during the year. Management has maintained its guidance of ~1mn tonne in incremental saleable steel volumes during FY14.

Performance review: The operating performance of Tata Steel Europe in Q1FY14 was significantly above DBe with the European operations reporting a recurring Ebitda of GBP 79m ($120m), against our expectations of $48m. The headline Ebitda numbers were amplified by GBP12m of one off related to provision write back. The positive surprise on recurring Ebitda was driven primarily by a 1% sequential improvement in pricing against our expectations of 3% decline. The conversion costs also declined on account of higher production levels - saleable steel producing jumped 16% q-o-q and improving operating parameters at recently revamped blast furnaces in Port Talbot and Ijmuiden.

Outlook: While the steel demand environment in Europe continues to be challenging, we are seeing some green shoots of recovery which can support a much more constructive outlook for H2FY14. Consequently, we are revising up our Ebitda/t forecasts for TS Europe to $23/tonne. We increase our profitability assumptions for TS Europe for FY14/15 by $3/$3 respectively. This should drive a 14.3%/9.6% increase in FY14/15 consolidated

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