 "UBS downgrades Tata Steel, slashes target price to Rs 460")
UBS downgraded Tata Steel from ‘Buy’ to ‘Neutral’ with a slash in target price from Rs 860 to Rs 460. The downgrade has been attributed primarily to three factors.
First, they expect lower operating profit (EBITDA) per tonne in Corus, from $50 to $22 in this fiscal year. Second, they project lower sales volume in fiscal year 2013 from 9.5million tonne (mt) to 7.9mt, given that 2.9mt new capacity at Jamshedpur will be commissioned only by March 2012. Third, they now expect capital expenditure of around $2.5 billion in both fiscal year 2012 and 2013 up from $1.9 billion expected earlier for both the years.
[caption id=“attachment_103270” align=“alignleft” width=“380” caption=“Ratan Tata, Chairman of the Tata Group. Reuters”]
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For Tata Steel, they now see operating profit estimates at Rs 2700 crore for this fiscal, down by 20 percent from earlier estimates and net profit at Rs 2200 crore down by 41 percent. For fiscal year 2013 too, they expectEBITDA to go down by 29 percent at Rs 5400 crore and net profit at Rs 4300 crore, down 51 percent for 2013.
They do not think Corus will recover in a hurry given the economic situation in the Western world and it will suffer all the more due to high debt and high cost structure. This quarter will therefore generate just a breakeven operating profit down from $78 per tonne in the first quarter. Their profits will suffer as steel prices have declined while raw materials prices have not cooled off.
Though Tata Steel has corrected more than 30 percent in last 6 months, the valuations do not look attractive yet. It is trading at 6 times its 2013 EV/EBITDA (enterprise value over operating profits of accompany, basically gives the amount required to generate a similar business). IBS has valued the Indian business at 7.4 times, Europe at 6 times, and others at 6.5 times Ev/EBITDA and has reached the target price of Rs 460. this estimate is below consensus estimates for the company but the firm believes the Street will also cut its estimates. But Tata Steel also holds shares in some group companies which has not been included in the stock valuation. If the company happens to sell any of its stake in the group companies, there will be upside to the target price, UBS says.