Share prices of Tata Steel jumped 4.45% on Wednesday to close above the Rs 600 mark. Analysts reckon that the strength in global steel prices have been one of the reasons for this. Prices are expected to gain from an average of $580 per tonne to $700 a tonne in the next two years. This would enable the company on a consolidated level to see earnings improvement and especially the Indian operations as it would depend to the extent of 60% from the domestic market.
Analysts expect the volumes to rise to 13.9 million tonnes for the end of the year and already for the month of November, the company has reported a 35% growth selling 498,000 tonnes of steel as against 370,000 tonnes in the earlier month. The EBITDA per tonne of steel produced has grown from $250 per ton in the first quarter of the current fiscal to $300 per ton levels for Indian operations. And overall even after considering poor Corus operations per tonne profitability has jumped from $10 per tonne to $50 levels in the second quarter of the year. The company has taken a already taken a restructuring charge of $220 million on the Teeside plant of Corus and the eventual closure of the plant would impact its profitability positively, reckon analysts at Nomura Securities.
They even expect a positive operating profit for the third quarter of the current fiscal. And, with this happening, the overall valuation of Tata Steel is set to improve. Currently, thanks to the Corus losses it commands an enterprise value of 4.6 times its EBITDA, which is much lower than the global peer average of 7.6 times, for 2010-11 earnings estimates.
And, this is considering that the Indian operations have a high return on equity of 22% foe the same period. Going ahead, the would be completing its ongoing 3 3 million tonne expansion in India by Dec 2010, production of coking coal at Mozambique by January 2011 and iron-ore production from Canada by May 2011.