Please refer to important disclosures at the end of this report 1 Y/E March ( ` cr) 2QFY12 2QFY11 % chg (yoy) 1QFY2012 % chg (qoq) Net sales 174 176 (1.2) 146 19.2 EBITDA 30 16 85.2 33 (9.8) EBITDA margin (%) 17.2 9.2 802bp 22.7 (552bp) Reported PAT 22 10 108.7 23 (3.5) Source: Company, Angel Research Tata Sponge Iron Ltd. (TSIL) reported marginally lower revenue on a yoy basis at `174cr in 2QFY2012 as compared to `176cr in 2QFY2011 on the back of hampered sponge iron production due to iron ore supply issues. This was partiallyoffset by increased sponge iron realization. However, EBITDA margin expanded by 802bp yoy from 9.2% in 2QFY2011 to 17.2% in 2QFY2012 on account of a decline in raw-material cost as a percent of sales. PAT increased by 109% yoy to `22cr in 2QFY2012 as compared to `10cr in 2QFY2011. We continue to maintain our Buy recommendation on the stock . Increased volumes to aid revenue growth: We expect TSIL to post a 16% CAGR in its revenue over FY2011-13E to `794cr in FY2013E due to resumption in sponge iron production and sales volume. The company gets assured supply of iron ore from Tata Steel, which insulates it from the price volatility in the spot market. TSIL has a 45% stake in Talcher coal block in Radhikapur, with estimated reserves of 120mn tonnes. Progress on the pending forest clearance for the block could be a trigger for the stock. Outlook and valuation: We expect TSIL to post a 16% CAGR in its revenue over FY2011-13E, while its EBITDA margin is expected to contract by 508bp from 22.2% in FY2011 to 17.1% in FY2013 due to increasing raw-material costs. PAT is expected to decline to `92cr in FY2013E from `101cr in FY2011. The stock is trading at a PE of 5.1x FY2013E earnings and P/B of 0.7x for FY2013E. We maintain our Buy recommendation on the stock with a target price of `382, based on a target P/B of 0.9x for FY2013E. Key financials Y/E March ( ` cr) FY2010 FY2011 FY2012E FY2013E Net sales 520 676 693 794 % chg (14.7) 30.0 2.6 14.6 % chg (30.0) 19.9 (13.6) 5.1 EBITDA (%) 23.8 22.2 18.7 17.1 EPS ( ` ) 54.9 65.8 56.9 59.8 P/E (x) 5.6 4.7 5.4 5.1 P/BV (x) 1.1 0.9 0.8 0.7 RoE (%) 22.0 21.9 16.1 15.0 RoIC (%) 40.2 57.6 48.8 44.0 EV/Sales (x) 0.7 0.4 0.4 0.3 EV/EBITDA (x) 3.1 1.7 1.9 1.5 Source: Company, Angel Research BUY CMP `307 Target Price `382 Investment Period 12 Months Stock Info Sector Bloomberg Code Shareholding Pattern (%) Promoters 43.7 MF / Banks / Indian Fls 7.3 FII / NRIs / OCBs 12.0 Indian Public / Others 37.0 Abs. (%) 3m 1yr 3yr Sensex (0.6) (17.9) 83.2 TSIL (1.2) (19.3)152.3 Beta 0.7 Metals Market Cap ( `cr) 472 52 Week High / Low 405/291 Avg. Daily Volume 9,432 Face Value ( `) 10 BSE Sensex 16,372 Nifty 4,906 Reuters Code TTSP.BO TTSP IN Shareen Batatawala +91- 22- 3935 7800 Ext: 6849 [email protected]Tata Sponge Iron (TSIL) Performance Highlights Company update | Metals November 18, 2011
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TSIL has a long-term supply agreement with Tata Steel for the assured supply ofiron ore which insulates it from the price volatility in the spot market. In the past, it
had leased out mining assets worth ` 6.3cr to Tata Steel to operate Khondbond
iron ore mines and supply iron ore to the company.
Stake in coal block can drive further upsides
TSIL has a 45% stake in Talcher coal block in Orissa, which has estimated reserves
of 120mn tonnes for captive consumption, for which forest clearance is pending.
Coal constitutes about 55% of the total raw-material cost for the company.
The company has deposited money for the first phase of land acquisition with the
Orissa government. Progress on forest clearance could be a potential trigger for
the stock.
Cash-rich company with substantially high return ratios
TSIL reported higher RoIC of 57.6% for FY2011, with cash reserves of ` 188cr in
FY2011. We expect the company to have RoIC of 48.8% and 44% in FY2012E and
FY2013E, respectively. The company’s cash reserves are expected to be at ` 221cr
by FY2013E-end.
Outlook and valuation
We have revised our revenue and earnings estimates downwards for FY2012E and
FY2013E, considering a hit on sponge iron production volumes and increasing
raw-material costs. We expect revenue to grow at a CAGR of 16% over
FY2011-13E and operating margin to contract by 508bp over FY2011-13E, from
22.2% in FY2011 to 17.1% in FY2013E. Profit is expected to decline in FY2013E to
` 92cr from ` 101cr in FY2011. At current levels, the stock is trading at a PE of 5.1x
FY2013E and P/B of 0.7x for FY2013E. We maintain our Buy recommendation on
the stock with a target price of ` 382, based on a target P/B of 0.9x for FY2013E.
Research Team Tel: 022 - 39357800 E-mail: [email protected] Website: www.angelbroking.com
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Disclosure of Interest Statement TSIL
1. Analyst ownership of the stock No
2. Angel and its Group companies ownership of the stock No
3. Angel and its Group companies' Directors ownership of the stock No
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