Nomura

We maintain our ?buy? rating on Tata Steel with a target price of R479 per share. We value the company on an SOTP valuation, which consists of R658 (6x FY14f EV/Ebitda ) for India operations, but negative R187 for Europe operations (5x FY14f EV/ebitda) and R8 for stakes in other businesses.

Overall, Q3FY13 results were weaker than estimates and concerns are more on account of continued disappointment of Indian operations. However, we think there are avenues of improvement from Q4FY13, given the higher sales volume.

In addition, we expect coke oven battery becoming fully operational. Tata Steel purchased 1,85,000 tonne coke during Q3FY13, which should come down in Q4FY13, and the company should be self-sufficient from FY14. The company saw higher realisations in January and expects further improvement.

In our view, coking coal costs should come down further with a fall in contract prices. Net debt has increased to $10.5 billion and could increase further, given that capex is continuing at higher levels and weaker-than-expected operating performance.

European operations have been reporting disappointing results for last 5-6 quarters. While the company has taken major restructuring exercise and fixed cost reduction initiatives, these have not yet translated into profitability. With Port Talbot BF commissioning, it has achieved another milestone.

We would wait to see if it starts to convert these initiatives into profitability going forward.

The company has identified some overseas markets to sell surplus hot-rolled coils at realisations very similar to domestic markets. It has maintained its guidance of sales volume of 7.6-7.7 million tonne for FY13f (i.e., sales volume in Q4FY13 could be closer to 2.5 mt). At the same time, sales volume in FY14 would be 1 mt highe. We have built in ~9 mt of sales volume in FY14, and thus, there could be downside to our estimates.

Tata Steel reported Q3FY13 results below our expectations at both the Indian and European operations on account of realisation pressures. However, southeast Asian operations reported Ebitda of $26 million versus our estimate of $45 million on back of higher volumes.