INDIA

SELL Tata Steel Ltd Metals

Result Update 7 February 2017
Rs410 Key Data
Strong but not sustainable, maintain Sell Target Price

CMP* Rs473 Bloomberg Code TATA IN

We retain Sell on Tata Steel with a revised TP of Rs410 as we believe that i) strong Downside 13.3% Curr Shares O/S (mn) 971.2
Q3 performance at standalone operations is unlikely to sustain due to likely Previous Target Rs340 Diluted Shares O/S(mn) 971.2
pressure on steel prices going ahead and sharp increase in RM costs from Previous Rating Sell Mkt Cap (Rsbn/USDbn) 459.2/6.8
unusually low base of Q3, ii) earnings from the residual European operations Price Performance (%)* 52 Wk H / L (Rs) 480.9/211.2

remain vulnerable to global spreads and iii) material balance sheet deleveraging 1M 6M 1Yr 5 Year H / L (Rs) 579.9/195.3
would remain elusive. Valuations remain pricey and risk reward unfavourable TATA IN 12.7 23.9 102.2 Daily Vol. (3M NSE Avg.) 5710477

barring an extremely favorable outcome of possible JV for European operations. NIFTY 6.4 1.0 17.1
*as on 7 February 2017; Source: Bloomberg, Centrum Research

Domestic operations deliver steep EBITDA/t increase: Blended realisations
increased by 4.1% QoQ to ~Rs41,800/t and were lower than expectations but net raw Shareholding pattern (%)*
material costs fell by ~13% QoQ and was not only a positive surprise but also largely Dec-16 Sep-16 Jun-16 Mar-16
unexplainable since coking coal costs increased sequentially. Volumes were strong at Promoter 31.4 31.4 31.4 31.4
~3 MT and were propped up by KPO (0.6 MT), while EBITDA/t stood at ~Rs11,300/t (vs FIIs 13.0 12.8 13.2 13.1
estimate of Rs7800/t). Standalone conversion costs per tonne were lower QoQ by Dom. Inst. 30.8 29.3 27.2 26.7

~Rs700/t as KPO volumes picked up. Management expects blended realisations to Public 24.8 26.5 28.2 28.8

increase by ~Rs3,000/t sequentially in Q4 which would offset the increase in coking Source: BSE, *as on 7 February 2017

coal costs according to them but we believe that the guidance on this front appears EBITDA and EBITDA margin (cons)
optimistic since domestic pricing in trade markets is already under pressure and raw 40,000 12.8 12.7 14
material costs could increase steeply in Q4. 11.3
12

European and other operations deliver muted performance: European 30,000
10
operations reported EBITDA/t of ~US$38 v/s US$67 in Q2 led by lower volumes due

(Rs mn)
7.5

(%)
20,000 8
to maintenance, higher RM and increased energy costs. South East Asian
6
operations performed better QoQ with EBITDA/t of ~US$29 while significant losses 10,000
2.8 4
of ~Rs5.8bn were booked in eliminations and other subs EBITDA line. As a result,
consolidated EBITDA stood at ~Rs35.4bn (~12% above expectation). 0 2
Q3FY16 Q4FY16 Q1FY17 Q2FY17 Q3FY17

Outlook EBITDA/t sustenance at higher levels unlikely: We have been Cons. EBITDA EBITDA Margin

positively surprised by the strong surge in domestic EBITDA/t metrics but are Source: Company, Centrum Research Estimates
unsure of its sustenance as RM cost increases havent got reflected in P&L and steel
Earnings Revision (Cons)
pricing in the domestic market has started coming back under pressure thereby
putting a serious cloud on spread sustenance. However, better conversion costs Particulars FY17E FY18E
(Rsbn) New Old Chg (%) New Old Chg (%)
and lower specific consumption are key positives. Profitability in residual European
operations would remain vulnerable to volatile spreads, imports pressure, currency Sales 1,091.6 1083.0 0.8 1,136.2 1121.2 1.3
EBITDA 142.8 145.7 (2.0) 175.6 171.0 2.7
movements (favourable for time being) and uncertain demand. We adjust our costs
EBITDA Margin (%) 13.1 13.5 15.5 15.2
& steel pricing estimates and build EBITDA/t of Rs9,875/10,479 for FY17E/18E for PAT-adj. 25.5 36.9 (30.8) 49.5 52.5 (5.7)
domestic operations (higher by 12%/8% vs earlier estimates). We maintain our Source: Centrum Research Estimates
EBITDA/t estimates for European operations and revise our consolidated EBITDA
estimates by (2)%/2.7% for FY17E/18E. Centrum vs. Bloomberg Consensus*
FY16E FY17E

Valuation and risks reiterate Sell: We remain concerned about its large debt Particulars
(Rsbn) Centrum BBG Chg (%) Centrum BBG Chg (%)
pile which is unlikely to reduce materially in the near future. We continue to value
Net Sales 1,091.6 1,153.1 (5.3) 1,136.2 1,234.4 (8.0)
TISCO at 6x EV/EBITDA but rollover to Mar19E to arrive at our revised TP of Rs410.
EBITDA 142.8 140.9 1.4 175.6 168.9 4.0
Reiterate Sell and recommend switch to non-ferrous names like Vedanta/Hindalco. PAT-adj. 25.5 22.2 15.0 49.5 41.3 19.9
Key upside risks are higher steel prices and value accretive JV for European
operations with ThyssenKrupp. Bloomberg Consensus* Centrum
Y/E Mar-Cons (Rs mn) Q3FY17 Q3FY16 YoY(%) Q2FY17 QoQ(%) Q3FY17E Var % Variance
Target
Target Price (%)
Net sales 2,79,565 2,80,390 (0.3) 2,63,710 6.0 2,81,328 (0.6) BUY SELL HOLD Price (Rs)
(Rs)
Raw materials 94,982 1,10,133 (13.8) 94,068 1.0 1,09,947 (13.6) 13 12 8 416 405 (2.6)
Employee costs 43,317 49,646 (12.7) 45,183 (4.1) 44,631 (2.9)
*as on 7 February 2017; Source: Bloomberg, Centrum Research Estimates
EBITDA 35,393 7,757 356.3 29,700 19.2 31,724 11.6
EBITDA margin (%) 12.7 2.8 11.3 11.3
Depreciation 13,797 11,327 21.8 14,677 (6.0) 15,000 (8.0)
Interest 13,874 9,641 43.9 13,511 2.7 14,000 (0.9)
Exceptional items (286) (7118) (593) 0
Tax 6,984 2,434 186.9 3,634 92.2 2,259 209.2
Profit/(loss) from disc. ops 569 - 1,227 -
Group PAT(rep) 2,319 (21,272) NA (494) NA 1,965 18.0 Abhisar Jain, CFA, abhisar.jain@centrum.co.in, 91 22 4215 9928
Source: Company, Centrum Research Prajwal Gote, prajwal.gote@centrum.co.in, 91 22 4215 9203

Y/E Mar (Rs mn) Revenue YoY (%) EBITDA EBITDA(%) Adj. PAT YoY (%) Adj. EPS (Rs) RoE (%) RoCE (%) PE (x) EV/EBITDA (x)
FY15 13,95,037 (6.1) 1,25,358 8.99 32 (99.9) 0.0 0.0 17.0 NM 8.4
FY16 11,71,516 (16.0) 75,857 6.48 9,256 NM 9.5 2.9 10.2 28.5 12.9
FY17E 10,91,603 (6.8) 1,42,819 13.08 25,542 176.0 26.3 8.6 4.5 18.0 7.6
FY18E 11,36,179 4.1 1,75,575 15.45 49,548 94.0 51.1 16.2 6.7 9.3 6.6
FY19E 11,42,775 0.6 1,83,251 16.04 52,721 6.4 54.3 15.2 6.8 8.7 6.3
Source: Company, Centrum Research Estimates

Centrum Equity Research is available on Bloomberg, Thomson Reuters and FactSet

 Exhibit 1: Sensitivity Analysis (FY17E)
Sensitivity to key variables % change % impact on EBITDA % impact on EPS
Sales volume 1 0.6 1.4
Realization 1 1.3 2.6
Source: Company, Centrum Research Estimates

Exhibit 2: Rolling forward EV/EBITDA chart

17

15

13

11

3
Jan-10

Aug-10

May-12

Dec-12

Jul-13

Feb-14

Sep-14

Jan-17
Nov-08

Jun-09

Mar-11

Oct-11

Apr-15

Nov-15

Jun-16
EV/EBITDA Mean Mean + Std Dev Mean - Std Dev

Source: Bloomberg, Company, Centrum Research Estimates

Exhibit 3: Comparative Valuations

Mkt Cap CAGR FY16-FY18E (%) EBITDA Margin (%) PE (x) EV/EBITDA (x) RoE (%) Div Yield (%)
Sector
(USD mn) Rev. EBITDA PAT FY16 FY17E FY18E FY16 FY17E FY18E FY16 FY17E FY18E FY16 FY17E FY18E FY16 FY17E FY18E

Tata Steel* 6,816 (1.5) 52.1 131.4 6.5 13.5 15.5 28.5 18.0 9.3 12.9 7.6 6.6 2.9 8.6 16.2 2.9 2.6 2.1
JSW Steel 6,782 24.0 46.6 - 14.6 20.7 20.4 (28.8) 12.0 11.2 10.3 6.9 6.3 (3.7) 14.6 16.0 0.8 0.7 0.7
POSCO 20,412 49.1 23.0 23.4 17.1 12.1 11.6 12.5 12.7 11.5 3.7 5.5 5.8 3.0 3.7 4.7 4.0 3.4 3.0
Nucor Corp 18,453 6.5 31.1 79.1 9.6 12.5 14.5 38.9 24.6 16.3 10.2 9.4 7.7 4.7 9.0 13.8 3.5 2.8 2.6
ThyssenKrupp AG 14,211 (1.6) 11.2 50.8 5.5 6.5 7.0 36.1 25.1 17.7 6.4 6.1 6.2 10.0 15.0 25.7 0.6 0.9 1.0
Source: Bloomberg consensus, *Centrum Research Estimates, NM-not meaningful

Exhibit 4: Valuation
Mar'19E (Rs mn)
Cons EBITDA 1,83,251
EV/EBITDA (x) 6

Total EV 10,99,504
Add: Cash* 1,01,993
Less: Debt 8,00,696

Fair Value 4,00,801

No. of shares (mn) 970

Fair Value/share (Rs) 410

Source: Company, Centrum Research Estimates, *includes investments valued at 20% holding co. discount

2
Tata Steel Ltd
Exhibit 5: Quarterly Financials (Cons)
Particulars (Rs mn) Q4FY15 Q1FY16 Q2FY16 Q3FY16 Q4FY16 Q1FY17 Q2FY17 Q3FY17
Net Sales 3,33,368 2,66,741 2,90,685 2,78,187 2,91,644 2,51,560 2,62,919 2,78,439
Other Operating Income 3,294 2,638 2,362 2,203 3,432 738 791 1,126
Total Income 3,36,662 2,69,378 2,93,047 2,80,390 2,95,076 2,52,298 2,63,710 2,79,565
Accretion to Stocks in trade & work in progress 21,641 (7,440) 1,141 9,567 19,027 (17,757) (9,995) (15,346)
Raw Material Consumed 88,110 77,638 87,837 76,248 70,574 69,232 77,172 80,880
Purchase of Semi/finished goods/traded goods 24,593 31,138 23,920 24,319 25,077 30,365 26,891 29,448
Employee Expenses 54,261 46,193 49,905 49,646 51,160 46,796 45,183 43,317
Purchase of power 14,352 12,499 13,790 13,171 12,890 12,203 12,083 12,363
Freight & Handling 23,008 17,109 20,449 19,885 19,810 16,932 16,920 18,451
Other Exp 95,267 65,414 77,700 79,798 74,485 62,107 65,756 75,061
Operating Profit (Core EBITDA) 15,430 26,828 18,305 7,757 22,052 32,420 29,700 35,393
Depreciation 15,127 13,371 13,708 11,327 12,319 12,417 14,677 13,797
EBIT 303 13,457 4,597 (3,570) 9,734 20,002 15,023 21,595
Interest 11,952 11,470 10,487 9,641 10,178 10,707 13,511 13,874
Other Revenue/Income 1,394 620 29,382 962 1,291 1,367 1,084 1,301
Other Excep. Items (restructuring, asset sales etc) (48,112) (1,446) (5,637) (7,118) (28,578) (1,678) (593) (286)
Profit Before Tax (58,367) 1,161 17,854 (19,367) (27,731) 8,984 2,004 8,736
Tax (1,345) 1,007 2,402 2,434 5,060 7,405 3,634 6,984
Tax rate (%) 2.3 86.7 13.5 (12.6) (18.2) 82.4 181.3 79.9
Profit After Tax (57,023) 154 15,452 (21,801) (32,791) 1,580 (1,630) 1,752
Less: Minority interest in income 154 - (8) 310 720 - - -
Add/(Less) - Share in the profit/(loss) of associates 126 63 (157) 219 (67) 142 (91) (3)
Profit/(loss) from discontinued ops (3,386) - - - (33,553) 1,227 569
PAT attributable to Consolidated Group (56,743) (3,169) 15,287 (21,272) (32,138) (31,831) (494) 2,319
Adjusted PAT for the group (8,631) 1,663 20,925 (14,155) (3,560) 3,400 (1,127) 2,035
Growth (%)
Net Sales (20.7) (26.2) (18.1) (16.5) (12.5) (5.7) (9.6) 0.1
EBITDA (69.2) (37.2) (49.8) (74.8) 42.9 20.8 62.3 356.3
Adj. PAT (179.8) (72.3) 1814.2 (1000.9) (58.8) 104.5 (105.4) (114.4)
Margin (%)
EBITDA 4.6 10.0 6.2 2.8 7.5 12.8 11.3 12.7
EBIT 0.1 5.0 1.6 (1.3) 3.3 7.9 5.7 7.7
PAT (reported bef minority interest) (16.9) 0.1 5.3 (7.8) (11.1) 0.6 (0.6) 0.6
Key Drivers
Volumes (MT)
Indian operations 2.4 2.1 2.3 2.3 2.7 2.1 2.6 3.0
Europe 3.8 3.4 3.3 3.4 3.6 2.5 2.3 2.4
South-East Asia 0.8 0.7 0.7 0.7 0.7 0.7 0.7 0.7
Realizations/tonne (US$)
Indian operations (Rs/t) 43,699 41,936 40,561 38,115 38,131 42,210 40,163 41,798
Europe 824 819 800 740 678 774 803 784
South-East Asia 520 510 448 417 399 465 452 453
Source: Company, Centrum Research

Exhibit 6: Key Performance Indicators

Assumptions FY15 FY16 FY17E FY18E FY1E
Volumes (MT)
Indian operations 8.8 9.5 10.9 11.7 12.4
Europe 13.7 13.6 9.7 10.0 10.0
South-East Asia 3.6 2.7 2.8 2.8 2.8
Realizations/tonne (US$/t)
Indian operations (Rs/t) 47,353 39,638 41,132 43,543 42,428
Europe 955 756 794 800 780
South-East Asia 594 442 475 450 450
Source: Company, Centrum Research Estimates

3
Tata Steel Ltd
Financials
Exhibit 7: Income Statement Exhibit 9: Balance Sheet
Y/E March (Rs mn) FY15 FY16 FY17E FY18E FY19E Y/E March (Rs mn) FY15 FY16 FY17E FY18E FY19E
Revenues 13,95,037 11,71,516 10,91,603 11,36,179 11,42,775 Equity Share Capital 9,714 9,702 9,702 9,702 9,702
Materials cost 5,56,674 4,48,161 3,71,060 3,83,762 3,76,229
Reserves & surplus 3,26,730 2,98,036 2,77,913 3,16,109 3,57,479
% of revenues 39.9 38.3 34.0 33.8 32.9
Shareholders' fund 3,36,444 3,07,739 2,87,615 3,25,811 3,67,181
Employee cost 2,14,076 1,99,668 1,79,495 1,84,899 1,87,928
% of revenues 15.3 17.0 16.4 16.3 16.4 Total Debt 8,05,937 8,60,696 8,50,696 8,20,696 8,00,696
Others 4,98,929 4,47,830 3,98,228 3,91,944 3,95,367 Def tax liab. (net) 28,618 28,830 28,830 28,830 28,830
% of revenues 35.8 38.2 36.5 34.5 34.6 Minority interest 17,039 16,542 16,542 16,542 16,542
EBITDA 1,25,358 75,857 1,42,819 1,75,575 1,83,251 Total Liabilities 11,88,037 12,13,807 11,83,683 11,91,879 12,13,249
EBITDA margin (%) 9.0 6.5 13.1 15.5 16.0
Gross Block 16,54,590 17,32,680 20,04,680 21,68,680 22,98,680
Depreciation & Amortisation 59,436 50,818 55,250 62,226 66,930
Less: Acc. Depreciation 9,65,176 11,21,252 11,76,501 12,38,727 13,05,656
EBIT 65,922 25,038 87,570 1,13,350 1,16,321
Interest expenses 48,478 41,286 51,342 45,963 44,313 Net Block 6,89,413 6,11,429 8,28,179 9,29,953 9,93,024
PBT from operations 17,444 (16,248) 36,228 67,387 72,008 Capital WIP 2,78,371 3,49,940 1,67,940 83,940 53,940
Other income 7,962 39,257 5,002 5,252 5,515 Net Fixed Assets 9,67,785 9,61,368 9,96,119 10,13,893 10,46,964
Exceptional items (39,287) (39,749) (2,556) - - Investments 34,551 68,006 68,006 68,006 68,006
PBT (13,881) (16,740) 38,674 72,639 77,523
Inventories 2,51,499 2,03,560 1,94,395 2,02,333 2,03,508
Taxes 25,674.1 15,049.6 16,256.5 23,716.0 25,213.1
Effective tax rate (%) (185) (90) 42 33 33 Sundry debtors 1,33,099 1,17,012 1,19,628 1,24,513 1,25,236
PAT (39,555) (31,790) 22,417 48,923 52,310 Cash 87,499 67,156 35,819 22,821 10,615
Minority/Associates 300 1,297 568 625 687 Loans & Advances 98,549 1,96,887 1,19,628 1,24,513 1,25,236
Extraordinary Items - - (31,757) - - Other assets 18,112 18,293 14,953 15,564 15,654
Reported PAT (39,255) (30,493) (8,772) 49,548 52,997 Total Current Asset 5,88,758 6,02,907 4,84,423 4,89,744 4,80,248
Adjusted PAT 32 9,256 25,542 49,548 52,997
Trade payables 1,91,899 2,03,883 1,70,469 1,77,431 1,78,461
Source: Company, Centrum Research Estimates Other current Liab. 1,09,085 1,03,271 1,04,674 1,08,949 1,09,581
Provisions 1,02,073 1,11,321 89,721 93,385 93,927
Exhibit 8: Key Ratios
Net Current Assets 1,85,702 1,84,433 1,19,559 1,09,980 98,280
Y/E March (Rs mn) FY15 FY16 FY17E FY18E FY19E Total Assets 11,88,037 12,13,807 11,83,683 11,91,879 12,13,249
Growth Ratio (%) Source: Company, Centrum Research Estimates
Revenue (6.1) (16.0) (6.8) 4.1 0.6
EBITDA (23.6) (39.5) 88.3 22.9 4.4
Adjusted PAT (99.9) NM 176.0 94.0 6.4
Exhibit 10: Cash Flow
Margin Ratios (%) Y/E March (Rs mn) FY15 FY16 FY17E FY18E FY19E
EBITDA 9.0 6.5 13.1 15.5 16.0
Operating profit before WC 1,39,554 81,750 1,09,074 1,76,200 1,83,938
PBT from operations 1.3 (1.4 ) 3.3 5.9 6.3
Adjusted PAT 0.0 0.8 2.3 4.4 4.6 Changes in working capital 3,514 54,332 (26,864) (5,862) (867)
Return Ratios (%) Cash flow from operations 1,18,798 1,19,632 65,953 1,46,622 1,57,857
ROE 0.0 2.9 8.6 16.2 15.2 Adj. OCF (OCF - Interest) 70,320 78,346 14,612 1,00,659 1,13,269
ROCE 17.0 10.2 4.5 6.7 6.8 Net Capex 1,49,359 1,16,916 90,000 80,000 1,00,000
ROIC 17.8 4.6 4.8 7.2 7.2
Adj. FCF (79,039) (38,571) (75,388) 20,659 13,269
Turnover Ratios (days)
Gross block turnover ratio (x) 0.8 0.7 0.6 0.5 0.5 Cash flow from investments (84,221) (1,04,242) (24,596) (72,305) (94,124)
Debtors 35 36 40 40 40 Cash flow from financing (26,172) (39,284) (72,694) (87,315) (75,940)
Inventory 66 63 65 65 65 Cash flow from investments 8,404 (23,894) (31,337) (12,998) (12,206)
Creditors 50 64 57 57 57 Source: Company, Centrum Research Estimates
Cash conversion cycle 50 36 48 48 48
Solvency Ratio (x)
Net debt-equity 1.8 2.3 2.5 2.2 1.9
Debt-equity 2.4 2.8 3.0 2.5 2.2
Interest coverage ratio 0.7 1.6 0.6 0.4 0.4
Gross debt/EBITDA 6.4 11.3 6.0 4.7 4.4
Current Ratio 1.2 0.9 0.9 0.9 0.9
Per share Ratios (Rs)
Adjusted EPS 0.0 9.5 26.3 51.1 54.3
BVPS 346.4 317.3 296.4 335.8 378.4
CEPS 20.8 21.0 47.9 115.2 123.3
DPS 10.1 8.0 10.0 10.0 10.0
Dividend payout % (25.1 ) (25.5) (110.6) 19.6 18.4
Valuation (x)*Avg Mkt Cap
P/E (adjusted) NM 28.5 18.0 9.3 8.7
P/BV 1.3 0.9 1.6 1.4 1.2
EV/EBITDA 8.4 12.9 7.6 6.6 6.3
Dividend yield % 2.2 2.9 2.6 2.1 2.1
5 Yr Avg AOCF/EV yield % 6.5 8.4 6.5 6.0 6.5
Source: Company, Centrum Research Estimates, NM not meaningful

4
Tata Steel Ltd
Appendix A
Disclaimer
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Tata Steel Ltd
The opinions and projections expressed herein are entirely those of the author and are given as part of the normal research activity of Centrum Broking
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Tata Steel price chart

800

600

400

200

0
Feb-14 Aug-14 Feb-15 Aug-15 Feb-16 Aug-16 Feb-17
TATA IN EQUITY

Source: Bloomberg, Centrum Research

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Tata Steel Ltd
 Disclosure of Interest Statement
1 Business activities of Centrum Broking Limited Centrum Broking Limited (hereinafter referred to as CBL) is a registered member of NSE (Cash, F&O
(CBL) and Currency Derivatives Segments), MCX-SX (Currency Derivatives Segment) and BSE (Cash
segment), Depository Participant of CDSL and a SEBI registered Portfolio Manager.
2 Details of Disciplinary History of CBL CBL has not been debarred/ suspended by SEBI or any other regulatory authority from accessing
/dealing in securities market.
3 Registration status of CBL: CBL is registered with SEBI as a Research Analyst (SEBI Registration No. INH000001469)

Tata Steel JSW Steel

4 Whether Research analysts or relatives have any financial interest in the subject company and nature of such
No No
financial interest
5 Whether Research analyst or relatives have actual / beneficial ownership of 1% or more in securities of the
No No
subject company at the end of the month immediately preceding the date of publication of the document.
6 Whether the research analyst or his relatives has any other material conflict of interest No No
7 Whether research analyst has received any compensation from the subject company in the past 12 months and
No No
nature of products / services for which such compensation is received
8 Whether the Research Analyst has received any compensation or any other benefits from the subject company
No No
or third party in connection with the research report
9 Whether Research Analysts has served as an officer, directoror employee of the subject company No No
10 Whether the Research Analyst has been engaged in market making activity of the subject company. No No

Rating Criteria
Rating Market cap < Rs20bn Market cap > Rs20bn but < 100bn Market cap > Rs100bn
Buy Upside > 20% Upside > 15% Upside > 10%
Hold Upside between -20% to +20% Upside between -15% to +15% Upside between -10% to +10%
Sell Downside > 20% Downside > 15% Downside > 10%

Member (NSE and BSE)

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CURRENCY DERIVATIVES: MCX-SX INE261454230
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SEBI REGD NO. : CDSL : IN-DP-CDSL-661-2012

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Tata Steel Ltd