24 April 2012
4QFY12 Results Update | Sector: Metals
Tata Sponge Iron
BSE SENSEX
S&P CNX
17,097
Bloomberg
Equity Shares (m)
52-Week Range (INR)
1,6,12 Rel. Perf. (%)
M.Cap. (INR b)
M.Cap. (USD b)
5,201
TTSP IN
15.4
379/233
9/6/5
5.0
0.1
CMP:INR325
TP:INR431
Buy
Consolidated
Tata Sponge's 4QFY12 adjusted PAT grew 9% QoQ (but down 41% YoY) to INR182m, higher than our estimate
of INR164m on the back of higher volumes of 73kt (v/s estimate 55kt). Reported PAT was impacted by the
payment of INR54m as finance charges on account of excise duty dispute. There seems to be some recovery
on mining constraints leading to higher volume for the quarter.
Net sales grew 41% QoQ (down 6% YoY) to INR1.84b on higher volume growth over the low base of 3QFY12.
Average calculated realization for sponge iron increased 13% QoQ to INR24,774/ton.
EBITDA grew 4% QoQ (down 45% YoY) to INR255m. EBITDA margin contracted 490bp QoQ to 13.9%. Calculated
EBITDA/ton declined 22% QoQ to INR3,489 on account of higher raw material prices, mainly coal.
Despite lower production and sales volumes, robust sponge realizations helped boost both revenue and
margins. Domestic sponge iron prices are currently close to their 3-year high levels (~INR24,000/ton v/s
INR22,293/ton in FY12) as many producers are suffering raw material shortages, especially iron ore post
Karnataka mining ban and increased regulatory oversight in Odisha.
Current cash and cash equivalents stand at INR2.2b with a dividend yield of 2.5%. Stock trades at attractive
valuations of FY13 EV/EBITDA of 1.4x, P/E of 4.8x and P/BV of 0.8x. Maintain
Buy.
Sanjay Jain
(SanjayJain@MotilalOswal.com);Tel:+9122 39825412
Pavas Pethia
(Pavas.Pethia@MotilalOswal.com); +9122 39825413

Tata Sponge Iron
Tata Sponge Iron: an investment profile
Company description
Tata Sponge is located at Bilaipada near Joda, in the
Keonjhar district of Orissa. It has a production capacity
of 390,000tpa of sponge iron. The company has also set
up 26MW of captive power plants to gain from the waste
hot gases released from its kilns, in phases.
Lacking growth triggers as no major capacity
expansion plans in the near future.
Iron ore supply concerns due to mining road permits
related problems in Odisha
Valuation and view
Key investment arguments
Located in close proximity to iron ore mines (25km
from plants), which saves transport cost. The
company has a strategic tie-up with Tata Steel,
wherein it has leased equipment to Tata Steel to
operate the Khondbond iron ore mine and it receives
iron ore at significantly lower cost.
Tata Sponge is one of the best managed sponge iron
plants in the country, with a wide service offering
profile and domain depth.
Radhikapur (East) coal block on commencement will
lower external dependence for coal.
Stock trades at attractive FY13 EV/EBITDA of 1.4x,
P/E of 4.8x and P/BV of 0.8x. Maintain
Buy.
Sector view
Key investment risks
Current sponge iron prices continue to remain close
to three high in domestic market (at ~INR24,000/ton
v/s INR22,293/ton in FY12) as producers suffers raw
material shortage especially iron ore post Karnataka
mining ban and increased regulatory rigor in Odisha.
Marginal sponge iron ore producers are forced either
to operate at lower capacity or incur high iron ore
cost. Prices are expected to remain strong as many
producers are suffering raw material shortage,
especially iron ore post Karnataka mining ban and
increased regulatory rigor in Odisha.
Earnings are highly leveraged to sponge iron prices.
EPS: MOSL forecast v/s consensus (INR)
Godawari
Power
3.2
2.5
0.5
0.4
0.5
0.3
3.6
2.2
Monnet
Ispat
8.6
8.4
1.1
1.0
1.5
1.3
6.1
5.2
MOSL
Forecast
68.1
61.9
Comparative valuations
Tata Sponge
Iron
FY13E
4.8
FY14E
5.2
FY13E
0.8
FY14E
0.7
FY13E
0.2
FY14E
0.1
FY13E
1.4
FY14E
0.7
P/E (x)
P/BV (x)
EV/Sales (x)
EV/EBITDA (x)
FY13
FY14
Consensus
Forecast
67.3
61.9
Variation
(%)
1.2
-
Target price and recommendation
Current
Price (INR)
325
1x FY13 BV
Target *
Price (INR)
431
Upside
(%)
32.8
Reco.
Buy
Stock performance (1 year)
Shareholding pattern (%)
Mar-12
Promoter
Domestic Inst
Foreign
Others
43.3
8.1
6.5
42.2
Dec-11
43.7
7.3
6.8
42.3
Mar-11
43.7
7.3
6.6
42.4
24 April 2012
2

Tata Sponge Iron
Financials and Valuation
24 April 2012
3

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Tata Sponge Iron
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