tata steel future projections
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8/4/2019 Tata Steel Future Projections
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For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES RATING SYSTEM AND OTHER DISCLOSURES.REFER TO THE END OF THIS MATERIAL.
INDIA DAILYFebruary 16, 2011 India 15-Feb 1-day1-mo 3-mo
Sensex 18,274 0.4 (3.1) (10.0)
Nifty 5,481 0.5 (3.1) (10.5)
Global/Regional indices
Dow Jones 12,227 (0.3) 3.7 9.1
Nasdaq Composite 2,804 (0.5) 1.8 11.6
FTSE 6,037 (0.4) 0.6 3.7
Nikkie 10,782 0.3 2.7 10.1
HangSeng 22,900 (1.0) (5.7) (3.3)
KOSPI 2,009 (0.1) (4.7) 5.8
Value traded India
Cash(NSE+BSE) 171 163 82
Derivatives (NSE) 1,507 2,105 1,429
Deri. open interest 1,547 1,524 1,716
Forex/money market
Change, basis points
15-Feb 1-day 1-mo 3-mo
Rs/US$ 45.5 2 7 29
10yr govt bond, % 8.1 (2) (12) 2
Net investment (US$mn)
14-Feb MTD CYTD
FIIs 50 (369) (1,756)
MFs 56 100 (282)
Top movers -3mo basis
Change, %
Best performers 15-Feb 1-day 1-mo 3-mo
HCLT IN Equity 483.0 0.2 2.6 23.1
BHARTI IN Equity 329.2 0.5 (4.2) 5.0
NACL IN Equity 405.2 1.9 6.2 4.7
TCS IN Equity 1097.7 (1.3) (2.0) 4.7
INFO IN Equity 3106.6 2.2 (3.1) 4.6
Worst performers
UT IN Equity 35.0 (3.6) (39.2) (53.0)
IVRC IN Equity 72.9 1.3 (33.7) (45.1)
PUNJ IN Equity 72.5 (1.0) (27.6) (39.2)
IBREL IN Equity 115.3 (1.7) (5.2) (38.3)
RCOM IN Equity 101.6 4.4 (26.7) (37.1)
Contents
Results
Tata Steel: Solid operational performance
Reliance Power: Expensive despite recent correction
IVRCL Infrastructures: Revenue and EBITDA gains nullified by interest cost anddepreciation
Jubilant Lifesciences: Disappointing quarter
News Round-up
India's textile, pharmaceuticals & services sectors could expect greater marketopenings & automobile parts companies may face stiffer competition after thecountry signs a trade agreement with Japan. (ECNT)
Oil PSUs to hike jet fuel price 4.1% in metros. Oil marketing companies will hikeprices by an average of INR 2,204.48 a kilo litre. (THBL)
Oil minister S Jaipal Reddy indicated that the govt. may not be able to clear CairnEnergy Plc's move to sell control in its Indian arm to Vedanta Resources without
meeting state run ONGC's (ONGC IN) demand for an equitable royalty regime in the
Barmer oilfields that account for 90% of Cairn India's (CAIR IN) valuations. (TTOI)
Kishore Biyani is spinning off his consumer durables business, Ezone, into a separateentity in order to maximize value from it. The promoter of Pantaloon Retail (PF IN) is
likely to induct strategic investors in 3 months. (ECNT)
Reliance Industries Ltd (RIL IN) is now going after the tablet PC market, presentlydominated by Apple and Samsung at the premium end. (BSTD)
GMR Infrastructures (GMRI IN) has raised around USD 113 mn of debt from IndiaInfrastructure Finance Company Ltd for modernizing Delhi International Airport.
(BSTD)
Tata Motors (TTMT IN) said it was redrawing distribution plans of its joint venturewith Fiat as sales number of the Italian car maker had not been up to expectations.
Tata Motors global sales up 16% in January. (BSTD)
TCS (TCS IN) expects to make its fully-integrated information technology solution forsmall and medium enterprises, iON, a 1 bn on business in five years. TCS has already
signed up over 130 clients for iON and plans to take the customer base to 1,000 in a
year. (BSTD)
Jindal Steel and Power Ltd (JSP IN) gets conditional green nod for Orissa plant. (THBL) Venus Remedies Ltd (VNR IN) announced the launch of its super speciality oncology
segment 'Passion Oncobiz', entailing an investment of USD 2 mn. (THBL)
HCL Technologies (HCLT IN) sets up Global Enterprise Mobility lab in Singapore.(THBL)
Source: ECNT= Economic Times, BSTD = Business Standard, FNLE = Financial Express, THBL = Business Line.
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For private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL.
Indian operations shine with unexpected spike in steel realization
Tata Steel reported 3QFY11 standalone EBITDA of Rs28.2 bn (+30.8% yoy, +7.3% qoq), 1.7%
ahead of our estimate. Unexpected 8.8% qoq increase in realization to US$993/ ton (our estimate
was US$958/ ton) drove most of the surprise at the EBITDA level. Such a spike in realizations was
against the industry trend; Tata Steel management attributed this to qoq increase in long productprices (Rs29,150/ ton, +6% qoq); in addition other steel products may have also contributed. Flat
product realizations declined sequentially. EBITDA/ ton increased to US$372, up 12.2% qoq. Net
income of Rs15.1 bn (+27% yoy, -26.7% qoq) missed our estimate on higher tax payout.
Consolidated net income missed our estimate, operational performance was strong
Tata Steel reported consolidated EBITDA of Rs34.2 bn (-6.7% qoq, +16.1% yoy). However, net
income of Rs8.3 bn (adjusted for extraordinary items) missed our and Street estimates. We
attribute the miss to two factors (1) Rs1.2 bn impairment charge in other income line after a fire in
Imjuiden plant destroyed a few facilities and (2) high effective tax rate of 39.7%.
Corus performance weak but on expected lines
On expected lines Corus reported a weak quarter with EBITDA of US$88 mn and EBITDA/ ton of
US$25 (-55% qoq, -33% yoy), though still better than our estimate. Lag impact of increase in raw
material prices (+9% qoq) on the P&L hurt profitability on a sequential basis. Performance was
helped by carbon credit sales of US$54 mn which in turn was partly offset by US$31 mn
impairment charge on certain Imjuiden assets. Tata indicates that carbon credit sales may recur as
long as plant capacity utilization is above 75%. Expect Corus profitability to improve in 4Q.
Maintain BUY on attractive valuations
Tata Steel trades at 5.9X FY2011E and 5.1X FY2012E EBITDA (adjusting for CWIP) and 8.8X
FY2012E earnings. Tata Steels brownfield expansion and investments in raw material projects can
deliver significant value in the medium term. Reinitiate with a BUY rating and end-FY2012E target
price of Rs710. We assign 6.5X to Tata Steel Indias FY2012E EBITDA and 5.5X to Corus.
Tata Steel (TATA)Metals & Mining
Solid operational performance. Tata Steels standalone and consolidated EBITDA was1.7% and 7% ahead of our estimate. However, below EBITDA line items such as high
tax provision and loss on impairment of assets led to net income miss. Corusperformance, on expected lines, was extremely weak. Tata Steel can deliver significant
earnings growth and stock performance over the next two years from cost-push based
steel price increase, growth from India brownfield expansion and overseas raw materialprojects. We reinstate coverage with a BUY rating and end-FY2012E TP of Rs710.
Tata Steel
Stock data Forecasts/Valuations 2010 2011E 2012E
52-week range (Rs) (high,low) EPS (Rs) (3.3) 64.4 69.7
Market Cap. (Rs bn) 589.6 EPS growth (%) (103.6) (2,051.8) 8.2
Shareholding pattern (%) P/E (X) (186.8) 9.6 8.8
Promoters 32.5 Sales (Rs bn) 1,023.9 1,128.4 1,204.5FIIs 17.0 Net profits (Rs bn) (3.3) 65.3 70.6
MFs 3.7 EBITDA (Rs bn) 80.4 153.8 175.4
Price performance (%) 1M 3M 12M EV/EBITDA (X) 13.2 6.7 5.8
Absolute (0.9) (0.3) 14.2 ROE (%) (1.5) 22.4 18.4
Rel. to BSE-30 2.2 10.8 0.2 Div. Yield (%) 1.1 1.2 0.0
Company data and valuation summary
739-449
BUY
FEBRUARY 16, 2011
RESULT
Coverage view: Attractive
Price (Rs): 617
Target price (Rs): 710
BSE-30: 18,274
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KOTAK INSTITUTIONAL EQUITIES RESEARCH 3
Debt increases by 11% to US$13.2 bn
Tata Steels consolidated gross debt and net debt increased by ~US$1.1 bn qoq to US$13.2
bn and US$11.8 bn, respectively. The following factors may have led to the increase (1)
increase in working capital requirements in Europe due to increase in raw material prices, (2)
US$250 mn increase due to fluctuation in various foreign currency debt of Tata Steel India.
Tata Steel indicates that all its FX debt is fully hedged and (3) gross block which increased byabout a US$1 bn. Note that Tata Steel has aggressive capex plans of about US$2.3 bn for
FY2012E and US$2.1 bn for FY2013E.
Update on strategic projects
DSO and New Millennium Corp. Tata Steel and New Millennium Corporation (NML) are inexclusive talks with respect to development of two of the latters iron ore projects
LabMag and KeMag which cumulatively have reserves of up to 5.6 bn tons. This
exclusivity agreement will expire on Feb 28, 2011. As far as the Direct Shipping Ore
project is concerned, environmental approval for the first phase has been obtained and
commercial iron ore production will likely commence by 2QCY12E.
Orissa project. Ground work to start construction for the Orissa project is alreadyunderway. Tata Steel has secured the project site with boundary wall and fence and
started piling, besides foundation at the sinter plant has commenced. Construction of
other utilities is under progress. Initial phase of the Orissa plant will start with steel-
making capacity of 3 mtpa.
Few changes to our estimates
We build in our economists revised Re/US$ forecast of Rs45.6, Rs45.5 and Rs44 for
FY2011E, FY2012E and FY2013E, respectively, from Rs45.5, Rs44.5 and Rs44.1 earlier. We
have also fine tuned our HRC price assumption for India business over the next two years
and build in higher raw material prices. We also model recent issuance of 57 mn share atRs610 from its follow-on public offering. All factors results in 6.5% and 3.9% reduction in
our FY2012E and FY2013E EPS. Our EBITDA estimates remain largely unchanged. Exhibit 1
details the key changes to our estimate. BUY with FY2012E fair value of Rs710/ share.
We value standalone India operations of Tata Steel at 6.5X FY2012E EBITDA. This is higher
than historical levels, but we believe it is fair as it partly captures volume growth potential
for the India business. Put slightly differently, FY2012E EBITDA does not capture brownfield
expansion while the debt taken for this expansion is fully captured in the EV; assigning
higher multiple corrects this anomaly. We assign 5.5X to Corus and far-east operations, fair
noting lower profitability and lack of raw material security. We value listed investments at a
20% discount to the market price.
Our target price captures value from MOU signed by Corus for sale of Teeside Cast Products
(TCP) plant to SSI, Malaysia for US$500 mn; this adds Rs24 to fair value. However, our fair
value does not capture any upside from New Millennium Corp (Canadian iron ore project) or
Riversdale Mining investment. Note that Rio Tinto recently extended an open offer to
acquire Riversdale Mining at an equity value of US$3.9 bn. Tata Steels stake in Riversdale is
worth Rs40/share at Rios acquisition offer price.
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Metals & Mining Tata Steel
4 KOTAK INSTITUTIONAL EQUITIES RESEARCH
Exhibit 1: Tata Steel, Change in estimates, March fiscal year-ends, 2011-13E (Rs mn)
Revised estimates Old estimates % change
2011E 2012E 2013E 2011E 2012E 2013E 2011E 2012E 2013E
Earnings (consolidated)
Net sales 1,128,398 1,204,467 1,232,243 1,149,759 1,181,781 1,224,905 (1.9) 1.9 0.6EBITDA 153,843 175,421 202,586 156,206 175,766 201,721 (1.5) (0.2) 0.4
Adj. PAT 65,270 70,606 88,655 63,411 71,290 87,106 2.9 (1.0) 1.8
EPS (Rs) 64.4 69.7 87.5 66.3 74.5 91.1 (2.9) (6.5) (3.9)
Volumes
India (mn tons) 6.4 6.9 9.0 6.5 7.1 9.0 (1.7) (2.8)
International operations (mn tons) 14.4 14.7 14.8 14.8 14.9 15.1 (2.4) (1.6) (2.3)
Pricing
HRC price India (US$/ton) 728 756 744 728 743 738 1.7 0.7
Realization (US$/ton) 1,110 1,142 1,117 1,085 1,100 1,067 2.3 3.8 4.7
Source: Kotak Institutional Equities estimates
Following factors underpin our BUY rating on Tata Steel
Cost-push based steel price increase will benefit Tata Steel India. We expect steelprices to move up led by (1) a cost-push increaseiron ore prices have increased by 20%
in the past three months to US$187/ ton China CFR on modest revival in demand
combined with persistent supply issues and (2) seasonal increase in demand in 1HCY11E.
This should benefit integrated players such as Tata Steel, in our view. A US$10/ ton
increase in iron ore prices benefits earnings by 5%. We assume that Corus with a
converter business model will earn steady conversion margin and will have the ability to
pass on raw material price increase to consumers.
Commissioning of value-accretive India capacity expansion. Tata Steel India is ontrack to commission 2.9 mtpa steel-making capacity expansion in Jamshedpur by end-2011. This will reflect in strong 27% volume growth in FY2013E. Note that the expanded
capacity will be self-sufficient on iron ore and generate profitability in excess of US$300/
ton. More important, EBITDA contribution from Indian operations may increase to 70%
of the overall EBITDA by FY2013E from less than 50% in FY2008-09. In our view, this will
significantly de-risk earnings.
Benefits from overseas raw material projects may surprise on the upside.Investments in raw material security, i.e. Riversdale Mining and New Millennium (iron ore
project in Canada) can potentially add US$300 mn to annual EBITDA. In any case, Tata
Steels holding is worth Rs40/share, based on Rios bid price for Riversdale. This value is
not captured in our target price and can be a positive catalyst.
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KOTAK INSTITUTIONAL EQUITIES RESEARCH 5
Exhibit 2: Interim results of Tata Steel (standalone), March fiscal year-ends (Rs mn)
(% chg.)
3QFY11 3QFY11E 3QFY10 2QFY11 3QFY11E 3QFY10 2QFY11
Net sales 73,974 73,423 63,749 71,068 0.7 16.0 4.1
Expenditure (45,768) (45,683) (42,180) (44,777) 0.2 8.5 2.2Consumption of raw materials (17,586) (16,301) (15,241) (15,637) 7.9 15.4 12.5
Staff Cost (5,985) (6,859) (6,523) (6,837) (12.7) (8.2) (12.5)
Power and fuel (3,454) (3,626) (3,032) (3,615) (4.8) 13.9 (4.5)
Freight and handling (3,968) (3,614) (3,581) (3,603) 9.8 10.8 10.2
Other Expenditure (14,775) (15,282) (13,803) (15,086) (3.3) 7.0 (2.1)
EBITDA 28,205 27,741 21,569 26,290 1.7 30.8 7.3
OPM (%) 38.1 37.8 33.8 37.0
Other income 113 630 2,636 7,327 (82.0) (95.7) (98.5)
Interest (3,354) (3,493) (4,157) (3,425) (4.0) (19.3) (2.1)
Depreciation (2,864) (2,871) (2,622) (2,815) (0.3) 9.2 1.7
Pretax profits 22,100 22,006 17,426 27,378 0.4 26.8 (19.3)
Extraordinaries
Tax (6,966) (5,502) (5,508) (6,726) 26.6 26.5 3.6Net income 15,135 16,505 11,918 20,651 (8.3) 27.0 (26.7)
Ratios
EBITDA margin (%) 38.1 37.8 33.8 37.0
ETR (%) 31.5 25.0 31.6 24.6
EPS (Rs) 15.3 17.8 12.1 20.9
Segment revenue
Steel business 67,731 58,325 64,971 16 4
Others 4,418 4,100 4,488 8 (2)
Segment EBIT
Steel business 23,015 20,141 21,764 14 6
Others 172 163 43 5 297
Margins
Steel business 34.0 34.5 33.5 (1.6) 1.4Others 28.9 21.7 32.9 32.9 (12.3)
Source: Company, Kotak Institutional Equities estimates
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Exhibit 3: Interim results of Tata Steel (consolidated), March fiscal year-ends (Rs mn)
3QFY11 3QFY11E 3QFY10 2QFY11 3QFY11E 3QFY10 2QFY11
Net sales 290,895 271,006 262,020 286,462 7.3 11.0 1.5
Expenditure (256,648) (238,986) (232,514) (249,739) 7.4 10.4 2.8
Consumption of raw materials (138,887) (120,191) (104,828) (124,064) 15.6 32.5 11.9
Staff Cost (36,087) (35,862) (41,999) (38,275) 0.6 (14.1) (5.7)
Power and fuel (10,314) (9,609) (10,845) (9,967) 7.3 (4.9) 3.5
Freight and handling (15,935) (14,009) (14,451) (14,676) 13.7 10.3 8.6
Other Expenditure (55,426) (59,314) (60,393) (62,757) (6.6) (8.2) (11.7)
EBITDA 34,246 32,020 29,506 36,723 7.0 16.1 (6.7)
OPM (%) 11.8 11.8 11.3 12.8
Other income (1,043) 714 4,099 8,143 (246.2) (125.5) (112.8)
Interest (7,432) (6,969) (7,630) (6,637) 6.6 (2.6) 12.0
Depreciation (11,264) (10,889) (11,547) (10,781) 3.4 (2.4) 4.5
Pretax profits 14,506 14,876 14,428 27,448 (2.5) 0.5 (47.1)
Extraordinaries 1,223 (1,957) (316) (162.5) (487.3)
Tax (6,240) (4,909) (8,148) (7,450) 27.1 (23.4) (16.2)Net income 9,489 9,967 4,323 19,682 (4.8) 119.5 (51.8)
Minority interest 161 103 (148) 103 56.9 (209.1) 56.9
Share of profit from associates 380 3 551 3 NM (31.0) NM
PAT after minority interest 10,030 10,072 4,726 19,788 (0.4) 112.2 (49.3)
Adjusted PAT 8,266 9,967 6,280 19,998 (17.1) 31.6 (58.7)
Income tax rate (%) 39.7 33.0 65.3 27.5
Ratios
EBITDA margin (%) 11.8 11.8 11.3 12.8
ETR (%) 39.7 33.0 65.3 27.5
EPS (Rs) 10.5 10.5 4.8 20.7
Segment revenue
Steel business 275,784 278,086 273,067 (0.8) 1.0
Others 32,357 26,020 30,067 24.4 7.6
Segment EBIT
Steel business 21,651 22,655 31,391 (4.4) (31.0)
Others 2,036 3,636 2,340 (44.0) (13.0)
Segment capital employed
Steel business 560,932 515,096 535,477 8.9 4.8
Others 51,757 40,055 48,788 29.2 6.1
Margins
Steel business 7.9 8.1 11.5 (3.6) (31.7)
Others 6.3 14.0 7.8 (55.0) (19.2)
(% chg.)
Source: Company, Kotak Institutional Equities estimates
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KOTAK INSTITUTIONAL EQUITIES RESEARCH 7
Exhibit 4: Tata Steel, Quarterly analysis of cost-structure, March fiscal year-ends (US$/ton)
3Q 2009 4Q 2009 1Q 2010 2Q 2010 3Q 2010 4Q 2010 1Q 2011 2Q 2011 3Q 2011
Tata Steel India
Steel business
Average realization 855 672 752 737 783 864 940 842 918Steel EBIT 246 147 228 239 270 342 387 282 312
Realization (US$/ ton) 906 723 803 798 847 927 1,014 912 993
Raw material cost 204 299 232 202 205 160 151 203 238
Employee cost 109 74 73 74 88 87 91 89 81
Power and fuel cost 50 32 47 42 41 43 56 47 47
Freight and handling 50 41 46 44 48 48 55 47 54
Other expenditure 222 122 162 173 185 201 217 196 200
EBITDA/ ton 270 155 243 264 280 387 444 332 372
Tata Steel (Consolidated)
Average realization 1,130 878 917 901 961 1,003 1,068 1,010 1,083
Steel EBIT 81 (40) (37) (22) 78 118 119 116 85
Steel EBITDA 117 (12) (3) 16 104 136 155 126 133
Realization (US$/ ton) 1,116 891 901 846 906 942 985 1,059 1,142
Raw material cost 616 514 460 395 362 361 375 459 545
Employee cost 150 130 153 145 145 135 137 142 142
Power and fuel cost 49 38 37 34 37 34 35 37 40
Freight and handling 47 44 45 49 50 51 57 54 63
Other expenditure 158 164 207 211 209 199 220 232 218
EBITDA/ ton 97 1 (1) 12 102 163 161 136 134
Source: Company, Kotak Institutional Equities estimates
Exhibit 5: Tata Steel, valuation, March fiscal year-ends, 2012E basis (Rs mn)
EBITDA Multiple Enterprise value EV
(Rs mn) (X) (Rs mn) (Rs/share)
Tata Steel standalone 122,600 6.5 799,353 789
Tata Steel Europe 44,473 5.5 244,601 241
Tata Steel thailand and other businesses 6,515 5.5 35,834 35
Total Enterprise Value 1,079,788 1,066
Consolidated group net debt 400,056
Total borrowings 400,056 395
Arrived market capitalization 679,732 671
Add: Value of investments 39,530 39
Arrived market capitalization 719,262 710
Target price (Rs) 710
Source: Kotak Institutional Equities estimates
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8 KOTAK INSTITUTIONAL EQUITIES RESEARCH
Exhibit 6: China import iron-ore fines from India (China CFR) prices (US$/ton)
-
50
100
150
200
250
Feb-05
Jun-05
Oct-05
Feb-06
Jun-06
Oct-06
Feb-07
Jun-07
Oct-07
Feb-08
Jun-08
Oct-08
Feb-09
Jun-09
Oct-09
Feb-10
Jun-10
Oct-10
Feb-11
China CFR 63% Fe
Source: Bloomberg, Kotak Institutional Equities estimates
Exhibit 7: Tata Steel, Key assumptions, March fiscal year-ends, FY2008-2013E (Rs mn)
2008 2009 2010 2011E 2012E 2013E
Tata Steel (India)
Benchmark HRC Price (US$/ton) 705 749 635 728 756 744Volume (mn tons) 4.8 5.2 6.2 6.4 6.9 9.0
EBITDA/ton (US$/ton) 394 380 307 389 391 355
Corus
Average realization (US$/ ton) 1,034 1,254 981 1,070 1,060 1,055
Volume (mn tons) 22.8 19.0 14.2 14.4 14.7 14.8
EBITDA/ton (US$/ton) 88 103 (20) 58 67 77
Re/US$ rate 42.5 46.0 47.3 45.6 45.5 44.0
Source: Company, Kotak Institutional Equities estimates
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Exhibit 8: Tata Steel (standalone), Profit model, balance sheet and cash flow model, March fiscal year-ends, 2008-2013E (Rs mn)
2008 2009 2010 2011E 2012E 2013E
Profit model (Rs mn)
Net sales 196,910 243,157 250,220 289,175 318,985 382,533
EBITDA 80,138 91,334 89,521 113,490 122,600 141,098Other income 2,428 3,083 8,538 8,664 2,865 2,865
Interest (7,865) (11,527) (15,084) (13,428) (12,930) (10,448)
Depreciation (8,346) (9,734) (10,832) (11,475) (13,490) (17,616)
Profit before tax 66,355 73,156 72,143 97,251 99,046 115,900
Extraordinaries 4,309 20,700
Taxes (23,793) (21,139) (21,675) (28,308) (29,714) (34,770)
Profit after tax 46,870 52,017 50,468 89,643 69,332 81,130
Fully diluted EPS (Rs) 47.5 52.7 51.2 72.9 68.4 80.1
Balance sheet (Rs mn)
Equity 218,282 242,319 371,688 503,046 563,286 635,323
Deferred tax liability 6,818 5,857 8,677 9,856 10,847 12,006
Total Borrowings 234,942 324,188 252,392 237,392 207,392 177,392
Current liabilities 78,401 100,077 99,568 86,690 93,200 104,947
Total liabilities 538,443 672,441 732,324 836,984 874,724 929,668
Net fixed assets 82,561 109,945 121,624 125,149 166,660 284,044
Capital work in progress 43,675 34,877 38,436 98,436 98,436 8,436
Investments 41,032 423,718 449,797 449,097 449,097 449,097
Cash 4,650 15,906 32,341 59,500 48,824 67,210
Other current assets 364,974 86,945 90,126 104,802 111,708 120,880
Miscellaneous expenditure 1,551 1,051
Total assets 538,443 672,442 732,324 836,984 874,724 929,668
Free cash flow (Rs mn)
Operating cash flow excl.working capital 60,778 66,599 71,874 102,297 83,812 99,904
Working capital changes 1,764 7,373 11,818 (8,849) (396) 2,574
Capital expenditure (23,951) (27,711) (20,237) (75,000) (55,000) (45,000)Free cash flow 38,591 46,261 63,455 18,448 28,417 57,479
Ratios
EBITDA margin (%) 40.7 37.6 35.8 39.2 38.4 36.9
EBT margin (%) 35.9 30.1 28.8 40.8 31.1 30.3
Debt/equity (X) 1.1 1.3 0.7 0.5 0.4 0.3
Net debt/equity (X) 1.0 1.1 0.5 0.3 0.2 0.1
Net debt/EBITDA (X) 2.7 3.0 2.1 1.3 1.0 0.5
RoAE (%) 26.4 22.7 16.5 20.5 13.0 13.5
RoACE (%) 16.7 13.9 12.3 14.1 12.1 13.1
Source: Company, Kotak Institutional Equities estimates
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Metals & Mining Tata Steel
10 KOTAK INSTITUTIONAL EQUITIES RESEARCH
Exhibit 9: Tata Steel (consolidated), Profit model, balance sheet and cash flow model, March fiscal year-ends, 2008-2013E (Rs mn)
2008 2009 2010 2011E 2012E 2013E
Profit model (Rs mn)
Net sales 1,315,336 1,473,293 1,023,931 1,128,398 1,204,467 1,232,243
EBITDA 177,824 181,277 80,427 153,843 175,421 202,586Other income 4,759 2,657 11,859 8,962 2,408 3,063
Interest (40,854) (32,902) (30,221) (28,076) (31,398) (30,147)
Depreciation (41,370) (42,654) (44,917) (45,048) (47,166) (50,401)
Profit before tax 100,359 108,378 17,147 89,680 99,264 125,100
Extraordinaries 63,351 (40,945) (16,837) 20,700
Taxes (40,493) (18,940) (21,518) (30,906) (29,779) (37,530)
Profit after tax 123,218 48,492 (21,208) 79,474 69,485 87,570
Minority interest (1,399) 409 (152) 400 360 324
Share in profit/(loss) of associates 1,682 607 1,269 507 761 761
Reported net income 123,500 49,509 (20,092) 80,381 70,606 88,655
Adjusted net income 110,441 61,750 (3,255) 65,270 70,606 88,655
Fully diluted EPS (Rs) 112.0 62.6 (3.3) 64.4 69.7 87.5
Balance sheet (Rs mn)
Equity 287,015 217,700 230,208 352,325 413,839 493,402
Deferred tax liability 24,545 17,094 16,541 17,645 18,141 18,767
Total Borrowings 590,973 653,732 531,004 476,004 461,004 446,004
Current liabilities 339,163 313,109 309,639 319,895 336,049 342,270
Minority interest 8,327 8,949 8,841 8,441 8,081 7,757
Total liabilities 1,250,022 1,210,583 1,096,232 1,174,309 1,237,113 1,308,198
Net fixed assets 331,187 364,175 365,252 375,204 416,148 525,157
Capital work in progress 88,476 88,880 92,706 134,706 134,206 44,206
Goodwill 180,500 153,649 145,418 145,418 145,418 145,418
Investments 33,675 64,111 54,178 54,685 55,447 56,208
Cash 42,319 61,484 67,878 43,818 41,635 84,266
Other current assets 572,309 477,229 370,800 420,477 444,259 452,943
Miscellaneous expenditure 1,556 1,055
Total assets 1,250,022 1,210,583 1,096,232 1,174,309 1,237,113 1,308,198
Free cash flow (Rs mn)
Operating cash flow excl. working capital 117,771 116,077 25,583 114,669 114,740 135,534
Working capital changes (22,227) 2,254 46,465 (39,421) (7,628) (2,463)
Capital expenditure (79,967) (83,608) (69,472) (97,000) (87,610) (69,410)
Free cash flow 15,578 34,723 2,577 (21,752) 19,501 63,661
Ratios
EBITDA margin (%) 13.5 12.3 7.9 13.6 14.6 16.4
EBIT margin (%) 10.4 9.4 3.5 9.6 10.6 12.4
Debt/equity (X) 2.1 3.0 2.3 1.4 1.1 0.9
Net debt/equity (X) 1.9 2.6 1.9 1.2 1.0 0.7
Net debt/EBITDA (X) 3.0 3.1 5.5 2.7 2.3 1.7RoAE (%) 51.0 24.5 (1.5) 22.4 18.4 19.5
RoACE (%) 14.6 9.9 (34.8) 12.1 13.1 14.6
Source: Company, Kotak Institutional Equities estimates
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For private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL.
Operating results beat estimates on better availability
RPWR reported revenues of Rs2.5 bn, operating profit of Rs617 mn and net income of Rs1.4 bn
against our estimates of Rs2.1 bn, Rs348 mn and Rs1.9 bn, respectively. Higher-than-estimated
revenues were primarily on account of better availability during the quarter (~80%) resulting in
better-than-estimated average realizations. Management has indicated that Rosa has secured the
permission to blend imported coal and availability and PLF should improve further going forward.Net income miss was primarily driven by significantly lower-than-estimated other income (Rs1 bn
against our estimate of Rs2.9 bn) which was partially offset by (1) lower depreciation on account
of change in depreciation policy for Rosa plant to align with UPERC rates (resulting in depreciation
being lower by Rs297.9 mn) and (2) tax write-backs on account of higher provisioning in previous
quarters.
Maintain SELL despite recent correction as execution and fuel risks remain high
RPWR stock has corrected by ~35% in past three months and is now trading at 1.9X FY2012E
book. We, however, maintain our cautious stance on RPWR given the limited visibility on near-
term earnings growth and high degree of execution and fuel risks embedded in the portfolio.
Continued uncertainty over availability of gas on account of slow ramp-up of supply from KG-D6
block makes us skeptical about the prospects on securing gas in the near term for the proposed
9,200 MW of gas-based capacities (including near-term 2,400 MW at Samalkot). Further, we
believe that UMPPs will not be the value driver for RPWR as they have been bid at a relatively
lower tariff structure. Our DCF-based valuation for Sasan and Krishnapatnam implies a P/B of 1X
on the total equity investment for these projects.
Retain SELL with a revised target price of Rs115/share
We maintain our SELL rating on RPWR with a revised target price of Rs115/share (previously
Rs135/share) as we adjust for dilution upon merger with RNRL. Our target price implies a P/B of
1.8X on FY2012E book value. We have revised our EPS estimates for FY2011E to Rs2.9/share
(previously Rs3.9/share) and for FY2012E to Rs4/share (previously Rs5.3/share) as we account for
dilution upon merger with RNRL and delays in commissioning of projects.
Reliance Power (RPWR)Utilities
Expensive despite recent correction. Reliance Power (RPWR) stock has corrected by~35% in the past three months and is now trading at 1.9X FY2012E book. We,
however, maintain our negative stance on account of (1) lack of fuel security for gas-based capacities, (2) dilution of earnings (and valuation) due to merger with RNRL, and
(3) inferior profitability of UMPPs. Operating results in 3QFY11 were ahead of our
estimate on account of better-than-estimated availability. Reiterate SELL.
Reliance Power
Stock data Forecasts/Valuations 2011 2012E 2013E
52-week range (Rs) (high,low) EPS (Rs) 2.9 4.0 2.5
Market Cap. (Rs bn) 290.7 EPS growth (%) 0.1 38.4 (36.7)
Shareholding pattern (%) P/E (X) 42.5 30.7 48.4
Promoters 84.8 Sales (Rs bn) 11.5 41.9 121.5
FIIs 3.8 Net profits (Rs bn) 8.0 11.1 7.0MFs 0.3 EBITDA (Rs bn) 3.0 15.9 43.7
Price performance (%) 1M 3M 12M EV/EBITDA (X) 220.5 48.0 18.8
Absolute (17.5) (33.4) (14.0) ROE (%) 5.2 6.6 4.0
Rel. to BSE-30 (14.8) (25.9) (24.5) Div. Yield (%) 0.0 0.0 0.0
Company data and valuation summary
193-106
SELL
FEBRUARY 16, 2010
RESULT
Coverage view: Cautious
Price (Rs): 121
Target price (Rs): 115
BSE-30: 18,274
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Utilities Reliance Power
12 KOTAK INSTITUTIONAL EQUITIES RESEARCH
Exhibit 1: Operating results beat estimates on better availabilityInterim results for RPWR, March fiscal year-ends (Rs mn)
(% Chg.)
3QFY11 3QFY11E 3QFY10 2QFY11 3QFY11E 3QFY10 2QFY11 FY2010 FY2011E (% Chg.)
Net sales 2,513 2,108 1,687 19 49 207 11,530 5,463
Operating costsCost of fuel (1,242) (1,242) (997) (221) (5,027) 2,175
Personnel costs (196) (193) (121) (153) (245) (1,200) 390
Other expenses (458) (324) (146) (254) (815) (2,286) 181
EBITDA 617 348 (267) 282 77 (331) 119 (1,073) 3,016 (381)
EBITDA margin (%) 25 17 17 (518) 26
Other income 1,038 2,912 1,792 3,437 8,227 8,961
Interest & finance charges (685) (520) (499) (70) (2,219)
Depreciation (77) (400) (2) (375) (57) (798)
PBT 892 2,341 1,523 2,845 (62) (41) (69) 7,026 8,960 28
Provision for tax (net) 544 (445) (186) (497) (187) (949)
Net profit 1,436 1,896 1,336 2,348 (24) 7 (39) 6,839 8,011 17
Extraordinary
EBITDA margin (%) 25 17 17 (518) 26
Tax rate (%) (61) 19 12 17 3 11
Key operating parameters
Units generated (MU) 719 690 545 149 2,989
PLF (%) 55 53 42 69 66
Average realization (Rs/kwh) 3.7 3.3 3.3 1.4 3.9
Cost of fuel (Rs/unit) 1.7 1.8 1.8 1.5 1.7
O&M (Rs/unit) 0.9 0.8 0.7 7.1 1.2
Source: Company, Kotak Institutional Equities estimates
Exhibit 2: Gross value of power projects (Rs bn)Capacity Equity Investment P/B Value Cost of equity
Project Type (MW) (Rs bn) (X) (Rs bn) (%)
Rosa I Coal 600 6.0 1.5 100% 9.2 12.5
Rosa II Coal 600 6.2 -0.2 100% -0.9 12.5
Butibori Coal 600 7.0 5.2 74% 26.7 12.5
Sasan UMPP Coal 3,960 41.0 1.0 100% 42.2 12.5
Krishnapatnam UMPP Imported coal 4,000 48.6 1.0 100% 47.7 12.5
Dadri Gas 6,400 38.4 1.9 100% 74.3 15.0
Chitrangi Coal 3,960 47.5 3.5 100% 166.5 15.0
Total 20,120 1.9 365.6
RPWR's
share
Source: Company, Kotak Institutional Equities estimates
Exhibit 3: Our SOTP-based target price is Rs115/shareValuation of RPWR
Valuation
(Rs bn) (Rs/share)
Gross value of power projects 366 130
Add: Equity to be invested (200) (71)
Add: Cash and cash and cash equivalent 157 56
Net Value 322 115
Source: Company, Kotak Institutional Equities estimates
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Reliance Power Utilities
KOTAK INSTITUTIONAL EQUITIES RESEARCH 13
Status of power projects and captive coal blocks
We highlight below the execution status of key power projects of RPWR as highlighted by
the management.
Rosa II (600 MW) the project has achieved all necessary milestone and construction is inprogress. The project has linkage from CCL (E grade coal). The project is likely tocommission by end-FY2012E.
Butibori (600 MW) the project has achieved all necessary milestone and construction isin progress. The project has linkage from WCL (D grade coal). The project is likely to
commission by June 2012.
Sasan UMPP (3,960 MW) all necessary clearances and approvals in place andconstruction has commenced. Management has indicated that production from Sasan
coal block is likely to commence by 2012. Peak production is likely to be 25 mtpa. A part
of the coal will be used for Chitrangi project. Management has guided for commissioning
of first unit by January 2012.
Krishnapatnam UMPP (3,960 MW) all necessary clearances and approvals in place.RPWR has acquired 3 coal mines in Indonesia for the project. Management has indicated
that production from Indonesian mines will commence by mid-2013 and RPWR will likely
ship in 25 mtpa of Indonesian coal. Indonesian coal will be inferior quality coal (GCV of
4,000 kcal/kg) and boilers for Krishnapatnam UMPP will be designed accordingly.
Management has guided for commissioning of first unit by September 2013.
Tilaiya UMPP (3,960 MW) the project is yet to achieve financial closure. Managementhas indicated that production from Tilaiya coal block will likely commence by 2013. Peak
production from the project will be 40 mtpa, part of which will be used to fuel expansion
at Tilaiya.
Chitrangi (3,960 MW) the project is yet to achieve financial closure and acquire theentire land for the plant. Project will use excess coal from captive coal blocks allocated for
Sasan UMPP. Management has guided for commissioning of first unit by September 2013.
Exhibit 4: Progress on UMPPs have been sedate with both Sasan and Krishnapatnam missing original commissioning guidanceExecution status of near-term projects of RPWR
Capacity
Project (MW)
Rosa II 600 Mar-12
Butibori 600 Jun-12
Sasan 3,960 WIP Jun-13
Krishnapatnam 4,000 WIP Jul-15
Chitrangi 3,960 WIP WIP Jul-14
Tilaya 4,000 WIP Jun-17
EPC
award
Expected
CoDLand Fuel
Enviroment
clearance
Financial
Closure
Source: Company, Kotak Institutional Equities estimates
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Utilities Reliance Power
14 KOTAK INSTITUTIONAL EQUITIES RESEARCH
Exhibit 5: Profit model, balance sheet, cash model of RPWR, March fiscal year-ends, 2009-2013E (Rsmn)
2009 2010 2011E 2012E 2013E
Profit modelNet revenues 207 11,530 41,890 121,541
EBITDA (1,031) (1,073) 3,016 15,918 43,734
Other income 3,604 8,227 8,961 10,125 5,085
Interest (expense)/income (70) (2,219) (5,934) (22,033)
Depreciation (2) (57) (798) (4,770) (14,823)
Pretax profits 2,570 7,026 8,960 15,339 11,963
Tax (119) (187) (310) (1,542) (2,665)
Deferred taxation (639) (2,286) (1,171)
Minority interest 1 (421) (1,103)
Net income 2,445 6,839 8,011 11,090 7,024
Extraordinary items
Reported profit 2,445 6,839 8,011 11,090 7,024
Earnings per share (Rs) 1.1 2.9 2.9 4.0 2.5
Balance sheetPaid-up common stock 23,968 23,968 28,051 28,051 28,051
Total shareholders' equity 137,791 144,630 167,294 178,384 185,408
Deferred taxation liability 689 2,975 4,146
Minority interest 1,679 2,100 3,203
Total borrowings 13,325 22,406 415,223 493,229 535,197
Total liabilities and equity 151,116 167,037 584,885 676,688 727,954
Net fixed assets 2,879 23,408 100,160 238,153 569,471
Capital work-in progress 46,780 68,029 432,280 398,568 126,960
Investments 103,172 79,152
Cash 216 1,338 42,386 22,491 5,341
Net current assets (excl. cash) (1,931) (4,890) 10,059 17,475 26,181
Net current assets (incl. cash) (1,715) (3,552) 52,445 39,966 31,523
Total assets 151,116 167,037 584,885 676,688 727,954
Free cash flowOperating cash flow, excl. working capital 2,447 6,896 9,447 18,567 24,121
Working capital changes (4,065) 2,959 (14,950) (7,416) (8,706)
Capital expenditure (39,351) (41,835) (441,801) (109,051) (74,533)
Free cash flow (40,969) (31,979) (447,303) (97,900) (59,118)
Ratios
Net debt/equity (%) 10 15 221 261 281
Return on equity (%) 1.8 4.8 5.1 6.4 3.9
Book value per share (Rs) 57.5 60.3 59.9 64.7 67.6
ROCE (%) 4.3 2.7 2.5 3.3
Source: Company, Kotak Institutional Equities estimates
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For private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL.
Reasonable revenue growth nullified by higher interest cost and depreciation
IVRCL reported revenues of Rs14.2 bn (up 15% yoy) and EBITDA margins of 9.9% (up 90 bps yoy)
led by lower raw material cost as a percentage of sales. The net profit line disappointed though,
led by higher interest cost of Rs592 mn (vs Rs372 mn last year and Rs480 mn in 2QFY11) and
depreciation cost of Rs199 mn (up 43% yoy) led to flat PAT of Rs423 mn. For 9MFY11, revenues
are Rs36 bn and EBITDA margin at 9.3% are flat yoy with higher interest cost and depreciationincrease leading to decline in PAT of 26%.
Revises full year guidance of Rs62.5 bn; we build in full year revenues of Rs58.2 bn
The management reduced the FY11 revenues guidance to Rs62.5 bn. The present guidance still
implies a strong growth of 35% in the last quarter. We believe this would be difficult to achieve
and have built in FY2011E revenues of Rs58.2 bn, implying yoy revenue growth of 18% in 4QFY11.
Equity for BOTs partly tied upmay scale up execution; IVRCL parent not to invest directly
Present portfolio of IVRCL Assets BOT projects requires incremental equity of about Rs13.5 bn.
Funds up to Rs6.5 bn are already tied up through (1) issue of compulsorily convertible debentures
of Rs2.5 bn to IFCI (2) Rs1.5 bn investment from UTI and (3) Rs2.5 bn NCDs. The rest are to be
funded from the stake sale of existing and upcoming BOT projects, land sales as well as equity
dilution in IVR Prime. IVRCL Infra. as a parent entity is not likely to invest in IVR Prime to fund the
equity of BOT projects.
Revise est. on back of higher interest cost; retain BUY on valuation, visibility and likely pick up
We have revised our FY2011E, FY2012E and FY2013E estimate to Rs7 (Rs7.7 earlier), Rs8.9
(Rs10.3 earlier) and Rs12.6 (Rs15.7) primarily based on higher interest cost versus earlier estimates.
We have revised our target price to Rs125 from Rs190 earlier based on (1) using 10X multiple now
versus 13X earlier, (2) lower valuation of listed subsidiaries (Rs20 impact) and (c) reduction in
earnings estimates. We retain our BUY rating as (1) execution of road projects may pick up as a
part of equity gets tied up, and agreements and financial closures are completed, (2) attractive
valuation 4X FY2012E P/E adjusted for equity holdings in IVR Prime and HDO, (3) order bookvisibility.
IVRCL (IVRC)Construction
Revenue and EBITDA gains nullified by interest cost and depreciation. IVRCLdelivered reasonable revenues growth of 15% yoy in 3QFY11, however, higher interest
cost and depreciation led to flat PAT yoy. The management reduced FY2011 revenueguidance to Rs62.5 bn (may still be aggressive as we build Rs58.2 bn). Debt and
working capital remain stable on a qoq basis, a partial tie up of equity for BOT assets
may help push execution as concession agreement, land, financial closure makeprogress. Retain BUY as stock trades at 4X FY2012E P/E adj. for equity holdings.
IVRCL
Stock data Forecasts/Valuations 2011 2012E 2013E
52-week range (Rs) (high,low) EPS (Rs) 7.0 8.9 12.6
Market Cap. (Rs bn) 19.2 EPS growth (%) (11.7) 28.1 40.7
Shareholding pattern (%) P/E (X) 10.3 8.0 5.7
Promoters 9.5 Sales (Rs bn) 58.3 72.7 92.5FIIs 57.7 Net profits (Rs bn) 1.9 2.4 3.4
MFs 7.9 EBITDA (Rs bn) 5.5 6.9 8.8
Price performance (%) 1M 3M 12M EV/EBITDA (X) 7.0 6.0 4.9
Absolute (34.5) (48.4) (54.7) ROE (%) 9.6 11.2 13.9
Rel. to BSE-30 (32.1) (42.9) (59.8) Div. Yield (%) 0.6 0.6 0.6
Company data and valuation summary
195-60
BUY
FEBRUARY 15, 2011
RESULT
Coverage view: Attractive
Price (Rs): 72
Target price (Rs): 125
BSE-30: 18,202
QUICK NUMBERS
Revenues at Rs14.2bn up 15% yoy
EBITDA marginsexpands 90 bps yoy
to 9.9%
Net PAT at Rs423mn flat yoy due to
interest cost (up
59% yoy) and
depreciation (up
43% yoy)
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Construction IVRCL
16 KOTAK INSTITUTIONAL EQUITIES RESEARCH
Result disappoint on interest cost and depreciation
IVRCL reported revenues of Rs14.2 bn, up 15% yoy. The company reported EBITDA margin
of 9.9%, up 90 bps yoy (9.0% in 3QFY10) and marginally better than our estimates of 9.5%.
The margin expansion was led by lower raw material cost as a percentage of sales. The
revenue and margin gains resulted in 26% yoy EBITDA growth to Rs1404 mn. IVRCL
disappointed on interest cost and depreciation leading to a net PAT of Rs433 mn, down 1%yoy and 3.3% below our estimate of Rs437 mn. Interest cost increased 59% yoy to Rs592
mn due to the interest rate increase. Depreciation also increased significantly by 43% to
Rs199 mn.
For the nine months ending December 31, 2010, IVRCL reported flat revenues of Rs36 bn
and EBITDA of Rs3.36 bn. As in 3QFY11, the company disappointed on below EBITDA line
items leading to 9MFY11 net PAT contraction of 26% to Rs937 mn.
Revenue and EBITDA margins gains nullified by higher interest cost and depreciationIVRCL - 3QFY11 - key numbers (Rs mn)
3QFY11 3QFY11E 3QFY10 2QFY11 vs est. yoy qoq 9MFY11 9MFY10 % changeNet Sales 14,188 13,199 12,347 10,750 7.5 14.9 32.0 36,002 35,386 1.7
CoGS (11,769) - (10,498) (8,812) 12.1 33.6 (29,703) (30,158) (1.5)
Constrn, stores & spares (5,325) - (4,263) (4,095) 24.9 30.0 (13,026) (13,311) (2.1)
Subcontracting exp. (1,894) - (2,563) (1,684) (26.1) 12.4 (5,479) (7,271) (24.6)
Masonry & labour (4,551) - (3,672) (3,033) 23.9 50.0 (11,198) (9,576) 16.9
Staff cost (604) - (479) (633) 26.1 (4.6) (1,888) (1,299) 45.3
Other expenditure (411) - (256) (352) 60.6 16.9 (1,045) (673) 55.4
Expenditure (12,784) (11,945) (11,233) (9,797) 7.0 13.8 30.5 (32,637) (32,130) 1.6
EBITDA 1,404 1,254 1,115 953 12.0 26.0 47.3 3,365 3,255 3.4
Other income 11 54 39 57 (79.3) (71.2) (80.2) 76 135 (43.5)
PBIDT 1,415 1,308 1,153 1,010 8.2 22.7 40.1 3,442 3,390 1.5
Interest (592) (486) (372) (480) 21.8 59.0 23.2 (1,525) (1,115) 36.8
Depreciation (199) (170) (139) (184)17.2 43.3 7.9
(540) (401)34.7
Profit before tax 625 653 643 345 (4.3) (2.8) 80.9 1,376 1,874 (26.6)
Tax (202) (215) (216) (112) (6.4) (6.6) 79.4 (440) (608) (27.8)
Profit after tax 423 437 427 233 (3.3) (0.9) 81.7 937 1,265 (26.0)
Order book
Order backlog 242,000 - 173,428 240,000 39.5 0.8 - - #DIV/0!
Order booking 16,188 - 41,275 53,450 (60.8) (69.7) - - #DIV/0!
Key ratios (%)
CoGS/Sales 83.0 - 85.0 82.0 82.5 85.2
Staff cost/sales 4.3 - 3.9 5.9 5.2 3.7
Other expenditure/sales 2.9 - 2.1 3.3 2.9 1.9
EBITDA margin 9.9 9.5 9.0 8.9 9.3 9.2
PBT Margin 4.4 4.9 5.2 3.2 3.8 5.3Net Profit margin 3.0 3.3 3.5 2.2 2.6 3.6
Effective tax rate 32.3 33.0 33.6 32.6 31.9 32.5
% change
Source: Company, Kotak Institutional Equities
Road projects execution slow as some projects may be just getting ready forexecution now
The slowdown in execution of the roads segment projects is reflected in the revenue
contribution of this segment (transportation segment) of 12% of the total 9MFY11 revenues
versus a backlog contribution of about 27%. We believe water resources and irrigationsegments have contributed their fair share to the revenues (equal revenue and backlog
contribution) while the buildings segment has recorded a strong revenue contribution of
about 24% versus a backlog contribution of 19%.
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IVRCL Construction
KOTAK INSTITUTIONAL EQUITIES RESEARCH 17
Segment wise break-up of IVRCL's order book and revenues for 1HFY11
9MFY11-end backlog (Rs242 bn)
Electrical
7%
Oil & Gas
1%
Water resources
46%
Buildings and
Industrial
19%
Transportation
27%
9MFY11 revenues (Rs36 bn)
Electrical
4%
Oil & Gas14%
Water resources
46%
Transportation
12%
Buildings and
Industrial
24%
Low r evenue contribution
from roads segment
versus backlog share
Strong buildings segment revenue
contribution versus backlog
contribution of 19%
Source: Company, Kotak Institutional Equities
Recently signed concession agreements for two BOT projects; Goa still remaining
The company has signed concession agreements for two of the three recent BOT project
wins viz. (1) Rs15 bn Sion-Panvel expressway (won in Sept-2010- financial closure likely tohappen soon) and (2) Rs7.5 bn Karanji-Wani-Ghuggus-Chandrapur road (won in Sept-2010
financial closure likely to happen soon). The Rs31 bn Maharashtra-Goa project (won in
June-2010) is still awaiting concession agreement and financial closure.
Sion-Panvel and Karanji-Chadrapur concession agreements signed in 3QFY11Key details of existing and recent BOT project wins of IVRCL
Sion-Panvel
Expressway
Karanji - Wani -
Ghuggus - Chandrapur
Mah/Goa border to
Goa/Kar border
Concession agreement yet to be signed
Project Description
25 kms of a 10-lane
concrete expressway from
Sion to Panvel
4 laning of Karanji - Wani
- Ghuggus - Chandrapur
highway
4/6 laning of 122 km
from Mah/Goa border to
Goa/Kar borderCompany's share 51% 100% 100%
Other partners Kakade Infra. NA NA
Project Type Toll Toll Toll
Concession Period 18 years and 9 months 30 years 23 years
Construction period 2 years 3 years
Grant structure No grant Rs2,318.4 mn VGF
Positive grant of
Rs6,647.2 mn
Project status
Concession agreement
signed, financial closure
expected soon
Concession agreement
signed, financial closure
expected soon
Concession agreement to
be signed
Estimated Funding structure (in Rs mn)
Total project Cost 14,500 7,500 31,000
Equity 3,000 1,295 7,170
Debt 7,600 3,886 6,647
Grant 3,900 2,318 2,318
IVRCL's Equity Commitment 1,530 1,295 7,170
Source: Company, Kotak Institutional Equities
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Construction IVRCL
18 KOTAK INSTITUTIONAL EQUITIES RESEARCH
Construction work has begun on several financially closed BOT projects including Baramati-
Phaltan, Chengapalli- Walayar and Indore-Gujarat.
Key details of completed and financially closed BOT projects of IVRCL
Jallandhar-
Amristar
Salem -
Kumarapalayam
Kumarapalayam
Chenagmpalli
Chennai
Water
Baramati-
Phaltan IOCL-tankage Indore-Gujarat
Chengapalli -
WalayarCompleted/ Financially closed projects
Project Description
4 laning of 49 km
Jallandhar-
Amristar stretch
53 km from Salem
to Kumarapalayam
47 km from
Kumarapalayam to
Chengapalli 100 MLD
4-laning of 78 km
Baramati-Phaltan-
Shirwal
Construction of
12 tanks
155 km Indore
to Gujarat/MP
border
6-lanning of 42
km Chengapalli-
Walayar stretchCompany's share 100% 100% 100% 75% 75% 37.5% 100% 100%
Other partners Befesa NA NA
Project Type Toll Toll Toll
Two part
tariff Toll
Annuity - (Rs350
mn per month) Toll Toll
Concession Period 17.5 years 20 years 20 years 25 years 15 years 27 years 25 years
Construction period 2.5 years 2 years 3 years
Grant structure
Positive grant of
Rs 330 mn
Positive grant of Rs
175 mn
Positive grant of Rs
1290 mn
Positive grant of
Rs1,220 mn No grant
Rs230 mn
revenue share
Rs360 mn
revenue share
Project status Operational Operational Operational Operational
25-27%
construction
completed
65%
construction
completed
Financial closure
achieved
7% construction
completedEstimated Funding structure (in Rs mn)
Total project Cost 3,430 5,020 4,215 5,680 3,820 30,000 15,200 11,250
Equity 671 800 650 1,730 700 2,250 3,800 4,250
Debt 2,365 2,930 3,390 3,950 1,900 2,250 -Sponser 11,400 7,000
Grant 395 1,290 175 1,220 25,500 - Senior
IVRCL's Equity 671 800 650 1,297 525 844 3,800 4,250
Source: Company, Kotak Institutional Equities
Order inflows just keeping pace; current backlog and its execution holds the key
The company reported an order backlog of Rs242 bn at end- 3QFY11 leading to an order
booking of about Rs16 bn in this quarter. The order backlog provides a revenue visibility ofabout 3.4 years based on forward four quarter revenues.
Order book visibility at about three years based on forward four quarter revenuesOrder backlog, booking and visibility (X) of IVRCL Infrastructure, March fiscal year-ends, 2002-3QFY11
-
40
80
120
160
200
240
280
FY02
FY03
FY04
FY05
FY06
FY07
1Q08
2Q08
3Q08
4Q08
1Q09
2Q09
3Q09
4Q09
1Q10
2Q10
3Q10
4Q10
1Q11
2Q11
3Q11
(Rs bn)
(0.4)
0.2
0.8
1.4
2.0
2.6
3.2
3.8
(years)Order Backlog (LHS) Order Booking (LHS) Visibility (RHS)
Source: Company, Kotak Institutional Equities estimates
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IVRCL Construction
KOTAK INSTITUTIONAL EQUITIES RESEARCH 19
Reduced full-year revenue guidance of Rs62.5 bn requires strong growth in 4Q
The management reduced the FY11 revenues guidance to Rs62.5 bn vs. earlier guidance of
Rs67.5-71 bn. The present guidance still implies 4QFY11 revenue of Rs26.5 bn and a strong
yoy growth of 35.6%. We highlight that the company had booked revenues of Rs18.9 in
4QFY10 which was the strongest quarter in the year.
We have built in revenues of Rs58.2 bn implying 17% yoy growth in 4QFY11E. Our full-year
margin assumption of 9.5% implies an EBITDA margin requirement of 9.8% in 4QFY11E
relatively flat on a yoy basis. Full-year PAT of Rs2 bn implies a net PAT of Rs930 mn in
4QFY11E versus Rs850 mn in 4QFY10.
IVRCL - 4QFY11E - implied key numbers (Rs mn)
9MFY11 9MFY10 % chg. 4QFY11E 4QFY10 % chg. FY2011E FY2010 % chg.
Net Sales 36,002 35,386 1.7 22,262 19,537 13.9 58,265 54,923 6.1
Expenditure (32,637) (32,130) 1.6 (20,092) (17,480) 14.9 (52,730) (49,610) 6.3
EBITDA 3,365 3,255 3.4 2,170 2,058 5.5 5,535 5,313 4.2
Other income 76 135 (43.5) 60 20 202.4 136 155 (12.0)
Interest (1,525) (1,115) 36.8 (625) (523) 19.5 (2,150) (1,639) 31.2Depreciation (540) (401) 34.7 (190) (142) 34.1 (730) (543) 34.5
PBT 1,376 1,874 (26.6) 1,415 1,412 0.2 2,791 3,286 (15.1)
Tax (440) (608) (27.8) (487) (569) (14.4) (927) (1,177) (21.3)
PAT 937 1,265 (26.0) 928 844 10.0 1,864 2,109 (11.6)
Order book
Order booking - - NA NA 98,501 NA 103,556 98,501 5.1
Key ratios (%)
EBITDA margin 9.3 9.2 9.7 10.5 9.5 9.7
PBT margin 3.8 5.3 6.4 7.2 4.8 6.0
Net PAT margin 2.6 3.6 4.2 4.3 3.2 3.8
Effective tax rate 31.9 32.5 34.4 40.3 33.2 35.8
Source: Company, Kotak Institutional Equities
Needs Rs13.5 bn of equity funding for road projects; may sell equity stake in
BOT projects
Present portfolio of IVRCL Assets BOT projects requires incremental equity of about Rs13.5
bn. Delays/difficulties in raising this equity would potentially lead to lower construction
revenues and/or may put stress on the standalone balance sheet. Funds up to Rs6.5 bn are
already tied up through (1) issue of compulsorily convertible debentures of Rs2.5 bn to IFCI
and (2) investment from UTI for about Rs1.5 bn and (3) issue of NCDs for a total of about
Rs2.5 bn. The rest are to be funded from stake sale of existing and upcoming BOT projects,
land sales etc. IVRCL Infrastructure as a parent entity is not envisaged to invest in equity of
BOT projects help in IVR Prime.
Debt and working capital remain stable on a qoq basis
IVRCL management indicated net debt at end-Dec 2010 of about Rs22 bn versus Rs21.2 bn
at end-Sept 2010 and Rs15.5 bn at FY2010-end level. The increase in debt levels was
primarily due to higher loans & advances to subsidiaries for investment in the BOT assets.
Loans and advances towards subsidiaries stood at about Rs4.5 bn versus end-FY2010 level
of about Rs2.8 bn. We have built in debt levels of about Rs23 bn at end-FY2011E.
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Construction IVRCL
20 KOTAK INSTITUTIONAL EQUITIES RESEARCH
Revise earnings estimates and target price to Rs125/share; retain BUY
We have revised our FY2011E, FY2012E and FY2013E estimate to Rs7 (Rs7.7 earlier), Rs8.9
(Rs10.3 earlier) and Rs12.6 (Rs15.7) earlier primarily based on higher interest cost versus
earlier estimates. We have revised our target price to Rs125 from Rs190 earlier based on (1)
using 10X multiple now versus 13X earlier (Rs30 impact on the target price), (2) lower
valuation of listed subsidiaries IVR Prime and Hindustan Dorr Oliver (Rs20 impact on thetarget price) and (3) reduction in earnings estimates (Rs20 impact on the target price).
Revised estimates for IVRCL, March fiscal year-ends, 2011E-12E (Rs mn)
FY2011E FY2012E FY2011E FY2012E FY2011E FY2012E
Revenues 58,265 72,655 58,664 74,642 (0.7) (2.7)
EBIDTA 5,535 6,902 5,573 7,091 (0.7) (2.7)
EBITDA margin (%) 9.5 9.5 9.5 9.5
PAT 1,864 2,389 2,063 2,759 (9.6) (13.4)
EPS (Rs) 7.0 8.9 7.7 10.3 (9.6) (13.4)
yoy growth (%)Revenus 6.1 24.7 6.8 27.2
EBITDA 4.2 24.7 (42.4) (38.0)
PAT (11.7) 28.1 (2.3) 33.7
EPS (11.7) 28.1 (2.3) 33.7
% revisionNew estimates Old estimates
Source: Company estimates, Kotak Institutional Equities estimates
We retain BUY as (1) execution of road projects may pick up as part of equity gets tied up,
and agreements and financial closures are completed, (2) attractive valuation 4X FY2012E
P/E adjusted for equity holdings in IVR Prime and HDO, (3) order book visibility.
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IVRCL Construction
KOTAK INSTITUTIONAL EQUITIES RESEARCH 21
Key order booking and execution segmental assumptions for IVRCL (standalone), March fiscalyearends,2008-13E (Rs mn)
2008 2009 2010 2011E 2012E 2013E
IVRCL Construction
Orders received 87,967 63,229 136,175 103,556 101,252 116,340
Revenues 36,622 48,819 56,000 58,265 72,655 92,542
Growth (%) 59.5 33.3 14.7 4.0 24.7 27.4
Order backlog - year end 122,415 136,825 217,000 262,292 290,889 314,688
Bill to book ratio 31.8 31.7 27.3 21.7 23.2 26.5
Segmental
Water resources and irr igation
Orders received 58,272 44,209 39,937 39,937 39,937 45,927
Growth (%) 181.1 (24.1) (9.7) - - 15.0
Revenues 17,824 25,874 26,000 25,594 32,020 38,306
Growth (%) 52.0 45.2 0.5 (1.6) 25.1 19.6
Order backlog - year end 75,728 94,063 108,000 122,343 130,260 137,881
Bill to book ratio 27.7 26.4 22.8 20.0 22.5 25.0
Transportation
Orders received 440 1,583 53,606 32,164 25,731 29,591
Growth (%) (80.3) 259.9 (40.0) 20 15.0
Revenues 6,933 6,346 7,000 8,635 13,409 23,320
Growth (%) 115.3 (8.5) 10.3 23.4 55.3 73.9
Order backlog - year end 11,157 6,394 53,000 76,528 88,850 95,121
Bill to book ratio 38.8 53.1 21.1 12.5 15.0 22.5
Buildings
Orders received 25,410 12,304 15,933 17,526 20,155 23,178
Growth (%) 445.9 (51.6) 29.5 10.0 15.0 15.0
Revenues 6,935 10,252 11,000 14,661 15,582 17,559
Growth (%) 77.4 47.8 7.3 33.3 6.3 12.7
Order backlog - year end 28,015 30,067 35,000 37,866 42,439 48,058
Bill to book ratio 31.2 30.0 28.9 33.5 32.5 32.5
ElectricalOrders received 3,845 5,132 12,700 11,430 11,430 13,144
Growth (%) (58.8) 33.5 147.5 (10.0) 15.0
Revenues 4,930 6,346 5,000 6,900 8,485 9,816
Growth (%) 20.2 28.7 (21.2) 38.0 23.0 15.7
Order backlog - year end 7,515 6,301 14,000 18,529 21,473 24,802
Bill to book ratio 46.9 63.0 39.5 35.0 35.0 35.0
Source: Company, Kotak Institutional Equities
We correspondingly revise our SOTP-based target price to Rs125/share from Rs190/share.
Our target price of Rs125/share is comprised of (1) Rs90/share from the core construction
business based on 10XFY2012E earnings, (2) IVRCL Assets contribution of Rs26/share, and(3) Rs10/share contribution from Hindustan Dorr Oliver.
We arrive at an SOTP-based target price of Rs125/share for IVRCL
Project/ Business
Valuation
(Rs mn) Rs/ share Valuation methodology
Value of core construction business 24,156 89 # P/E multiple of 10X FY2012E earnings
Value of Hindustan Dorr Oliver 2,697 10 # Discount to market price
Value of IVRCL Prime Developers Ltd 6,921 26 # Discount to market price
Total 125 #
Source: Company, Kotak Institutional Equities estimates
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Construction IVRCL
22 KOTAK INSTITUTIONAL EQUITIES RESEARCH
Profit model and balance sheet of IVRCL, March fiscal year-ends, 2007-13E (Rs mn)
2007 2008 2009 2010E 2011E 2012E 2013E
Income statement
Operating Income 23,059 36,606 48,819 54,923 58,265 72,655 92,542
Operating Expenses (19,497) (30,965) (41,772) (46,281) (49,525) (61,975) (78,938)EBITDA 2,301 3,544 4,145 5,313 5,535 6,902 8,791
Other Income 74 45 299 155 136 148 160
Interest & Finance charges (308) (407) (1,233) (1,637) (2,150) (2,611) (2,913)
Depreciation (216) (328) (473) (543) (730) (863) (1,007)
Profit Before Tax 1,851 2,853 2,738 3,288 2,791 3,576 5,032
Tax expense (436) (749) (478) (1,177) (927) (1,187) (1,671)
PAT 1,415 2,105 2,260 2,111 1,864 2,389 3,361
EPS (Rs) 10.9 15.8 16.9 7.9 7.0 8.9 12.6
Balance sheet
Total share holders funds 13,217 16,060 18,106 18,533 20,276 22,544 25,784
Share Capital 259 267 267 534 534 534 534
Reserves & Surplus 12,918 15,789 17,839 17,999 19,742 22,010 25,250
Loan Funds 5,561 10,678 13,980 16,133 22,883 24,883 27,383
Working Capital Loan 2,864 5,215 7,645 9,103
Long term 1,580 5,159 3,949 3,489 22,542 24,542 27,042
Total Sources of Funds 18,834 26,841 32,203 34,791 43,159 47,427 53,168
Net fixed assets 2,435 3,733 5,403 6,017 6,684 7,321 8,064
Net block 1,929 3,192 5,207 5,664 6,434 7,071 7,814
Capital WIP 506 541 196 353 250 250 250
Investments 2,829 3,409 3,892 6,138 5,910 6,210 6,210
Net Current Assets (excl Cash) 11,332 17,928 21,900 20,992 27,381 30,989 35,139
Cash and Bank Balances 2,238 1,772 1,009 1,644 3,184 2,907 3,755
Total 18,834 26,841 32,203 34,791 43,159 47,427 53,168
Free cash flow
Net cashflow from operating activites (4,340) (3,657) 22 5,213 (1,769) 2,255 3,131
Net PBT 1,851 2,853 2,738 3,288 2,791 3,576 5,032
Add: Depreciation 216 328 473 543 730 863 1,007
Add: Financial Charges 308 407 1,233 1,637 2,150 2,611 2,913
Tax paid (399) (650) (449) (1,162) (1,051) (1,187) (1,671)
Change in wcap. (6,316) (6,596) (3,972) 908 (6,390) (3,608) (4,150)
Cash flow from investing activities (1,407) (2,264) (2,611) (5,087) (1,169) (1,800) (1,750)
Free cash flow (5,747) (5,922) (2,589) 127 (2,938) 455 1,381
Key ratios
EBITDA margin (%) 10.0 9.7 8.5 9.7 9.5 9.5 9.5
PAT margin (%) 6.1 5.7 4.6 3.8 3.2 3.3 3.6
Debt/ equity (X) 0.4 0.7 0.8 0.9 1.1 1.1 1.1
Net debt/ equity (X) 0.3 0.6 0.7 0.8 1.0 1.0 0.9
ROAE (%) 15.7 14.4 13.2 11.5 9.6 11.2 13.9ROACE (%) 10.7 10.4 10.5 9.6 8.5 9.1 10.6
Source: Kotak Institutional Equities
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For private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL.
3QFY11 revenues up 2% qoq, in line with our estimate
Sales at Rs8.7 bn were in line with our estimate with (1) services business (19% of sales)
underperforming, down 14% qoq due to delay in customer approvals in CMO business and delay
in milestone fees and (2) products business of lifecycle ingredients/generics was higher than our
est. by 5% and up 13% yoy with volume growth at 17%, indicating pricing pressure still remains
despite price improvement sequentially.
EBITDA margin at 15% was lower than our estimate of 18% and down 350 bps qoq
EBITDA margin excluding other income was down 350 bps qoq to 15% on account of (1) negative
margin in services business in 3QFY11 versus 2.6% in 9MFY11 due to postponement of milestone
income and (2) lower margin in products business at 22.8% in 3QFY11 versus 23.3% in 9MFY11,
implying that pricing pressure in pyridine and chemicals business still remains. This is despite this
business witnessing (1) 7% qoq increase in sales, (2) sequential improvement in selling pricing and
(3) adequate raw material inventory.
We cut our FY2011-12E est. by 16-30%
We cut our FY2011-12E est. by 16-30% to account for (1) acute margin pressure faced by the
services business. Our analysis shows EBITDA margin in services business excl. high-margin contract
of H1N1 was 10-12% in 9MFY10 which has collapsed to 3% in 9MFY11. We believe steady state
margin of 16-18% outlined by Jubilant is contingent upon healthy revenue generation, which has
not been seen YTD, with DDDS facing sales dip of 20% in 9MFY11 and sequential decline in CMO
business in 3QFY11, (2) poor revenue generation (5% in 9MFY11 excl. one-time H1N1 business)
and (3) increase in interest cost on account of inc. in debt to repay FFCB in May 2011E.
We downgrade to REDUCE from BUY with PT of Rs220 (from Rs350), 13X FY2012E
We believe the key revenue drivers are some time away(1) new launches in APIs, the two major
sartans Jubilant has filed DMF for expire only in 2012E and (2) revenue generation from capacity inpyridines is likely in 2HFY12-13E.
Jubilant Life Sciences (JOL)Pharmaceuticals
Disappointing quarter. While sales were in line, EBITDA margin at 15.4% was down350 bps qoq and below our est. of 18% due to (1) steep margin dip in services business
and (2) sequential decline of around 150 bps in margin of products business (80% ofsales) which is perplexing, given (1) 7% qoq increase in its sales, (2) sequential
improvement in selling pricing and (3) adequate raw material inventory. We cut our
FY2011-12E est. by 16-30% to account for (1) acute margin pressure the business isfacing and (2) poor revenue generation (5% in 9MFY11 excl. one-time H1N1 business
last year) and (3) increase in interest cost on account of FCCB repayment in May 2011E.We downgrade to REDUCE with PT of Rs220 (from Rs350), 13X FY2012E.
Jubilant Life Sciences
Stock data Forecasts/Valuations 2010 2011E 2012E
52-week range (Rs) (high,low) EPS (Rs) 26.5 14.6 16.9
Market Cap. (Rs bn) 30.7 EPS growth (%) 49.0 (45.1) 15.9Shareholding pattern (%) P/E (X) 7.3 13.3 11.4
Promoters 47.3 Sales (Rs bn) 37.8 34.5 38.7
FIIs 25.5 Net profits (Rs bn) 4.5 2.6 2.7
MFs 5.9 EBITDA (Rs bn) 8.3 5.8 7.0
Price performance (%) 1M 3M 12M EV/EBITDA (X) 6.6 10.1 8.2
Absolute (25.1) (36.4) (39.9) ROE (%) 26.3 11.9 12.1
Rel. to BSE-30 (22.7) (29.3) (47.2) Div. Yield (%) 1.0 1.0 1.3
Company data and valuation summary
406-185
REDUCE
FEBRUARY 16, 2011
RESULT, CHANGE IN RECO.
Coverage view: Cautious
Price (Rs): 193
Target price (Rs): 220
BSE-30: 18,274
QUICK NUMBERS
We downgrade toREDUCE with PT ofRs220 (from Rs350),
13X FY2012E
3QFY11 revenues,up 2% qoq, in line
with our estimate
EBITDA margin at15% was lower
than our estimate
of 18% and down
360 bps qoq
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Pharmaceuticals Jubilant Life Sciences
24 KOTAK INSTITUTIONAL EQUITIES RESEARCH
Interim results- Jubilant, March fiscal year-ends (Rs mn)
3QFY11 3QFY11E 3QFY10 2QFY11 3QFY11E 3QFY10 2QFY11
Net sales 8,665 8,553 8,650 8,500 1 0 2
Change in stock 107 - (95) NM NM NM
Cost of trading goods sold 729 - 499 NM NM 46
RM consumed 2,681 3,250 3,102 2,778 (18) (14) (4)
Stores, spares 568 513 549 522 11 4 9
Mfg exp 700 684 710 673 2 (1) 4
Staff cost 1,777 1,850 1,790 1,789 (4) (1) (1)
Selling exp 843 684 870 756 23 (3) 11
Exchange loss/(gain) (35) - (570) 7 NM NM NM
Total Expenditure 7,368 6,982 6,450 6,929 6 14 6EBITDA 1,297 1,571 2,200 1,571 (17) (41) (17)
EBITDA, % 15.0 18.4 25.4 18.5 (3) (10) (4)
Other income 42 100 100 73 (58) (58) (43)
Interest 286 300 390 221 (5) (27) 29
Depreciation 493 500 310 488 (1) 59 1
PBT 560 871 1,600 934 (36) (65) (40)
Tax 108 131 200 42 (17) (46) 158
PAT 452 740 1400 892 (39) (68) (49)Minority interest (8) (5) 30 (5) NM NM NM
PAT before exceptional 460 745 1,370 897 (38) (66) (49)Exceptional item (19) - (420) (7) NM NM NM
PAT 441 745 950 891 (41) (54) (50)
Lifescience ingredients 5,820 5,517 5,240 5,470 5 11 6
Generics 1,180 1,121 950 1,100 5 24 7
CMO 1,150 1,391 1,750 1,390 (17) (34) (17)
Drugs discovery & development 490 493 690 510 (1) (29) (4)Hospitals 25 30 20 30 (17) 25 (17)
Total 8,665 8,553 8,650 8,500 1 0 2
% change
Source: Kotak Institutional Equities estimates, Company
Revenue break-up (Rs mn)
9MFY10 9MFY11 % FY2010 FY2011E % FY2012E % FY2013E %
LS Ingredients 15,630 16,600 6 20,813 22,534 8 25,650 14 28,277 10
Generics 2,820 3,270 16 3,820 4,400 15 5,272 20 6,118 16
Products 18,450 19,870 8 24,633 26,934 9 30,922 15 34,394 11
CMO 4,400 3,930 (11) 6,620 5,301 (20) 5,558 5 5,912 6
DDDS 1,930 1,540 (20) 2,490 2,142 (14) 2,048 (4) 2,112 3
Hospitals 60 90 50 80 115 44 140 22 141 1
Services 6,390 5,560 (13) 9,190 7,558 (18) 7,746 2 8,165 5
Total 24,840 25,430 2 33,823 34,492 2 38,667 12 42,560 10
Adjusted growth 24,240 25,430 5 32,075 34,492 8 38,667 12 42,560 10
Source: Kotak Institutional Equities estimates, Company
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Jubilant Life Sciences Pharmaceuticals
KOTAK INSTITUTIONAL EQUITIES RESEARCH 25
Sartans to add to revenues only from 2HFY12E
API Patent expiry Brand name Innovator DMF filed Genericised
Esprosartan 2014 Teveten Abbott Y N
Candesartan Dec-12 Atancand Astrazeneca Y N
Losartan 4QFY11E Hyzaar Merck Y Y
Valsartan Sep-12 Diovan Novartis Y N
Olmesartan 2016 Benicar Daiichi N N
Telmisartan 2014 Micardis Boehringer N N
Irbesartan 2011 Avalide Sanofi N N
Source: US FDA
Debt and interest cost details (Rs mn)
FY2009 FY2010 Sep-10 Dec-10 FY2011E FY2012EFCCB 9,750 8,610 6,390 6,350 6,350 -
Debt in standalone (Rupee) 9,331 6,800 3,990 5,880 6,019 10,354
Debt in standalone (FC) 6,190 4,710 7,750 7,600 7,600 7,600
Debt in Sub (Rupee) 600 510 510 260 260 260
Debt in Sub (FC) 12,910 10,570 10,070 9,700 9,700 9,700
Gross debt 38,781 31,200 28,710 29,790 29,929 27,914Cash 6,530 7,601 1,410 980 1,690 500
Net debt 32,251 23,599 27,300 28,810 28,238 27,414
Net debt/Equity 2.5 1.1 1.2 1.4 1.3 1.2
Interest cost calculationInterest bearing debt (Rupee) 9,931 7,310 4,500 6,140 6,279 10,614
Interest bearing debt (FC) 19,100 15,280 17,820 17,300 17,300 17,300
Total interest bearing debt 29,031 22,590 22,320 23,440 23,579 27,914Average interest rate (Rupee) 10.6% 8.9% 9.0% 8.9% 10.0%Average interest rate (FC) 3.8% 4.2% 4.2% 4.2% 4.5%
Interest cost 1,558 1,292 1,626Interest cost in P&L 1,505 1,028 1,600
Interest cost (%) 5.8% 4.9% 5.0% 4.4% 6.2%
Source: Kotak Institutional Equities estimates, Company
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Pharmaceuticals Jubilant Life Sciences
26 KOTAK INSTITUTIONAL EQUITIES RESEARCH
Profit and loss statement, March fiscal year-ends, 2008-2013E (Rs mn)
2008 2009 2010 2011E 2012E 2013ENet sales 24,889 35,175 37,812 34,492 38,667 42,560Operating expenses
Materials (13,834) (18,461) (20,024) (15,713) (16,578) (17,927)Selling and administration (1,458) (1,805) (3,520) (5,979) (6,907) (7,180)
Employee cost (3,670) (6,575) (7,453) (7,254) (8,342) (9,594)
R&D (228) (285)
Others (1,420) (3,629) 1,070 50
Total expenditure (20,382) (30,469) (29,926) (28,897) (31,827) (34,701)EBITDA 4,507 4,706 7,886 5,595 6,840 7,858Depreciation and amortisation (1,039) (1,632) (1,247) (1,970) (2,200) (2,400)
EBIT 3,468 3,074 6,639 3,625 4,640 5,458Net finance cost (337) (1,070) (1,505) (1,028) (1,600) (1,800)
Other income 1,430 425 373 226 200 200
Pretax profits before extra-ordinaries 4,561 2,428 5,507 2,824 3,240 3,858Current tax (557) (623) (957) (299) (583) (695)
Deferred tax 12 127
Fringe benefit tax (28) (28) Reported net profit 3,988 1,904 4,550 2,525 2,657 3,164Minority interests 16 133 (5) 29 32 35
Reported net profit after minority inter 4,005 2,037 4,545 2,553 2,688 3,199Exceptional items 790 (331) (233)
PAT after minority interests and excep. 4,005 2,827 4,214 2,320 2,688 3,199
Source: Kotak Institutional Equities estimates, Company
Balance sheet statement, March fiscal year-ends, 2008-2013E (Rs mn)
2008 2009 2010 2011E 2012E 2013EBalance sheetNet worth 12,563 12,675 21,893 21,171 23,393 25,940
Debt 21,085 38,781 31,200 29,929 27,914 27,520
Current liabilities 6,679 11,943 12,728 10,876 10,153 11,036
Deferred tax liabilities 1,516 1,470 2,303 2,275 2,243 2,208
Total equity and liabilities 41,842 64,870 68,124 64,250 63,703 66,704Cash and cash equivalents 5,238 3,817 5,037 1,000 500 500
Current assets 12,160 15,855 17,278 17,581 16,924 18,825
Net assets incl CWIP 23,988 42,484 43,245 44,979 46,279 47,379
Investments 456 2,714 2,564 690
Total uses of funds 41,842 64,870 68,124 64,250 63,703 66,704
Free cash flowOperating cash flow, excl. working 5,247 4,218 7,041 5,413 6,169 7,040
Working capital (1,895) 1,553 (752) (2,157) (160) (1,205)
Capital expenditure (7,241) (7,383) (2,011) (3,704) (3,500) (3,500)
Investments (418) (2,257) 149 1,874 690
Free cash flow (4,306) (3,868) 4,427 1,426 3,199 2,335
Source: Kotak Institutional Equities estimates, Company
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31 KOTAK INSTITUTIONAL EQUITIES RESEARCH
Disclosures
Kotak Institutional Equities Research coverage universeDistribution of ratings/investment banking relationships
Source: Kotak Institutional Equities As of September 30, 2010
* The above categories are defined as follows: Buy = We expect
this stock to outperform the BSE Sensex by 10% over the next 12
months; Add = We expect this stock to outperform the BSE
Sensex by 0-10% over the next 12 months; Reduce = We expect
this stock to underperform the BSE Sensex by 0-10% over the
next 12 months; Sell = We expect this stock to underperform the
BSE Sensex by more then 10% over the next 12 months. These
ratings are used illustratively to comply with applicable
regulations. As of 30/09/2010 Kotak Institutional EquitiesInvestment Research had investment ratings on 156 equity
securities.
Percentage of companies covered by Kotak Institutional Equities,
within the specified category.
Percentage of companies within each category for which Kotak
Institutional Equities and or its affiliates has provided investment
banking services within the previous 12 months.
11.5%
23.1%
32.1% 33.3%
3.2%
5.1% 5.1%
0.6%
0%
10%
20%
30%
40%
50%
60%
70%
BUY ADD REDUCE SELL
Ratings and other definitions/identifiers
Definitions of ratings
BUY. We expect this stock to outperform the BSE Sensex by 10% over the next 12 months.
ADD.We expect this stock to outperform the BSE Sensex by 0-10% over the next 12 months.
REDUCE. We expect this stock to underperform the BSE Sensex by 0-10% over the next 12 months.
SELL. We expect this stock to underperform the BSE Sensex by more than 10% over the next 12 months.
Our target price are also on 12-month horizon basis.
Other definitions
Coverage view. The coverage view represents each analysts overall fundamental outlook on the Sector. The coverage view will consist of one of the following
designations: Attractive, Neutral, Cautious.
Other ratings/identifiers
NR = Not Rated. The investment rating and target price, if any, have been suspended temporarily. Such suspension is in compliance with applicable
regulation(s) and/or Kotak Securities policies in circumstances when Kotak Securities or its affiliates is acting in an advisory capacity in a merger or strategic
transaction involving this company and in certain other circumstances.
CS = Coverage Suspended. Kotak Securities has suspended coverage of this company.
NC = Not Covered. Kotak Securities does not cover this company.
RS = Rating Suspended. Kotak Securities Research has suspended the investment rating and price target, if any, for this stock, because there is not a sufficient
fundamental basis for determining an investment rating or target. The previous investment rating and price target, if any, are no longer in effect for this stock
and should not be relied upon.
NA = Not Available or Not Applicable. The information is not available for display or is not applicable.
NM = Not Meaningful. The information is not meaningful and is therefore excluded.
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