25 July 2015
Update | Sector: Metals
Tata Steel
BSE Sensex
28,112
S&P CNX
8,522
CMP: INR265
TP: INR362 (+37%)
Buy
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Research, Sales and Trading
FY15 Annual Report Analysis
Cash flows disappoint; seeks approval for INR100b capital issue
Stock Info
Bloomberg
Equity Shares (m)
M.Cap.(INR b)/(USD b)
52-Week Range (INR)
TATA IN
971.4
257.4/4.0
574 / 264
-17/-31/-
1, 6, 12 Rel. Per (%)
60
Avg Val (INR m)/Vol ‘000 2182/5399
Free float (%)
68.7
M.Cap.(INR b)/(USD b)
574 / 264
Financial Snapshot (INR Billion)
Y/E Mar
2015 2016E 2017E
Sales
EBITDA
Adj. PAT
Adj. EPS (INR)
EPS Gr(%)
BV/Sh. (INR)
RoE (%)
RoCE (%)
Payout (%)
Valuations
P/E (x)
P/BV
EV/EBITDA (x)
Div. Yield (%)
92.7
1.4
7.7
3.0
13.3
1.4
7.1
3.0
5.0
1.1
5.0
3.0
1,395 1,312 1,427
128
2.8
2.9
185
1.3
6.1
43.2
143
19.4
20.0
193
10.6
7.2
44.3
202
51.9
53.4
236
24.9
10.7
17.1
-91.9 598.9 167.6
A scrutiny of annual report revealed that net debt was stable because of
asset sale and lower capex, while the business required net additional
borrowings of INR53b due to lower-than-expected cash flow generation
(e.g. working capital increase in India and surge in interest paid). Tata Steel
is seeking approval for INR100b capital issue. Average finance cost has
increased as lower-cost debts are getting substituted by higher-cost project
debt. We are raising the finance cost materially (+17% to INR55b for FY17E).
As a result, EPS is cut by 5/7% for FY16/17E.
Tata Steel Europe (TSE)
generated free operating cash flow after a long
time, but it was largely due to the release of working capital and temporary
expansion of spreads. TSE continues to burn cash year after year due to high
sustenance capex and wafer-thin margins. Multiple restructuring have
hardly helped in improving margins. TSE UK is under stress from adverse
movement of currency, high energy cost, weak demand and import
pressure. Pension fund deficit has added to the woes. The key question still
remains unanswered: How long will TSE UK be allowed to burn cash?
Tata Steel India (TSI)
is close to commissioning a new 3mtpa capacity (KPO).
All clearances are received. This will drive volume growth beginning 2HFY16.
While the MMDRA Act 2015 has paved the way for clarity on captive mining
in India, the landed cost of minerals will increase.
Financial analysis of TSI
suggests that iron ore cost per ton of steel
increased INR1870/t due to closure of mines. On counting the benefits of
lower coking coal prices etc., a total of INR4000/t correction in costs is
expected. Inventories have increased sharply, while payables reduced.
South East Asia:
Nat steel suffered huge losses on the squeeze of spread.
Steel melting has been substituted by billet purchases. Margins were under
pressure in Thailand too.
Book value down 23% to INR323/share
due to impairments, actuarial
losses and overseas subsidiaries losses.
SOTP reduced by 17% to INR362/share:
Lower-than-estimated cash flow
generation affected capex and thus CWIP. Although the value of net debt
was in-line, reported CWIP was INR58b lower than our estimate due to
higher capitalization, lower capex, disposal, impairment, and currency
movements. This has affected sum-of-the parts (SOTP) valuation by
INR60/share. Further, the valuation of quoted investments has declined
20% to INR79/share. Consequently, the SOTP reduced 17% to INR362/share.
Maintain BUY.
Risk:
Volatility in steel prices refuses to abate. Steel prices corrected 10% in
just one month. The spreads too are under pressure. If prices don’t recover,
we expect further risk to our estimates.
Sanjay Jain
(SanjayJain@MotilalOswal.com); +91 22 3982 5412
Dhruv Muchhal
(Dhruv.Muchhal@MotilalOswal.com); +91 22 3027 8033
Investors are advised to refer through disclosures made at the end of the Research Report.
Motilal Oswal research is available on
www.motilaloswal.com/Institutional-Equities,
Bloomberg, Thomson Reuters, Factset and S&P Capital.

Tata Steel
Tata Steel UK
Lost decade for Tata Steel
TSE UK has been burning
cash year after year
Since (barring the initial few years) the acquisition, TSE has been burning cash year
after year due to high sustenance capex and cost of energy & operation. Although
Ijmuiden operations (accounting for 45% of production) are profitable and the
business is sustainable, the UK operations (once British Steel) are high cost and
unsustainable. The pension funds deficit also adds to the woes. All the aforesaid
points have been highlighted in the annual report this time. The operations of
British Steel became unsustainable in 1990-2000; it got first lease of life when it
merged with Hoogovens (Ijmuiden) in 1999 to form Corus and second lease of life
when Corus was acquired by Tata Steel in early 2007, in our view.
Knowing very well the challenges and cash burn in running TSE UK, Tata steel has
been desisting from biting the bullet. Instead, it has been trying to revive the
operations through restructuring, investments and re-engineering the product mix;
however, this has not resulted in any material improvement in operations in the last
eight years. One can blame it in on tough market conditions and cyclical downturns;
however, cyclical downturn are there to weed out inefficient capacities from the
system so that more productive capacities can expand and overall cost of
production reduces for the world as a whole (thereby leading to growth). The
decision to keep running TSE UK is like working against nature. One wrong
investment triggered a wave of wrong investments—e.g., iron ore and coal
investments overseas. There have been some lucky escapes (e.g., disinvestment in
Riversdale).
Tata Steel has been hoping that the size of its more productive TSI will grow to an
extent that it will dilute the impact of TSE UK, without realizing that TSI’s high
margins are not going to sustain forever. It has been selling its family jewels to fund
losses overseas and capex in India. Although volumes for TSI have increased, the
margins are under pressure on rising operating costs, royalties and pressure on steel
pricing—the MDA (Management Discussion & Analysis) highlights this. A quick look
at the cash flow shows that Tata Steel has to keep raising debt/equity despite having
sold USD1.8b of assets and liquidated investments of USD1.05b over FY12-15.
Although net debt was stable in FY15, the company had to raise USD877m debt to
bridge cash flow gaps. In the light of shrinking margins for Indian business, we
believe a tougher decision for TSE UK is needed. Will lenders force a tougher
decision for TSE UK? Tata Steel is seeking shareholders’ approval to raise INR100b in
debt/equity capital.
Exhibit 1: Cash flow summary for the group
FY07-11
INR m USD m
516,070 11,490
-373,910 -8,325
-551,764 -12,285
108,402 2,414
189,215 4,213
-49,268 -1,097
-148,334 -3,303
309,589 6,893
FY12-15
INR m USD m
496,334 8,868
-575,200 -10,277
100,685 1,799
58,760 1,050
9,014
161
-45,993
-822
-168,664 -3,014
125,064 2,235
FY15
FY07-15
INR m USD m
USD m
118,798 1,945
20,359
-134,924 -2,209
-18,603
15,974
261
-10,486
14,841
243
3,463
167
3
4,374
-11,520
-189
-1,919
-56,938
-932
-6,316
53,602
877
9,128
Source: Company, MOSL
2
Decision to keep running
TSE UK is like working
against nature
In the light of shrinking
margins for Indian business,
we believe a tougher
decision for TSE UK is
needed.
Will lenders force a tougher
decision for TSE UK?
A lost decade for Tata Steel
Opr. Cash flow
Capex
M&A/sales
Investments
Equity
Dividend
Interest
Net increase in debt
25 July 2015

Tata Steel
MDA: Business environment challenging
TSE UK under stress; Indian mining eases, but cost up; KPO on track
Business environment challenging—UK right sizing a priority
The chairman in his statement highlighted continued fragility and uncertainty of the
global economy, especially with regard to the impact of the Chinese slowdown and
the Eurozone crisis. The company’s management will continue to focus on
operational and commercial excellence across its operations and leverage asset
footprint to drive customer centricity with its differentiated product portfolio to
overcome the market challenges.
High energy cost and
stronger currency are key
disadvantages of operating
in the UK. 720 redundancies
announced.
The UK business of Tata Steel Europe is the most impacted by the surge of Chinese
imports as UK’s domestic demand continues to be weak. While the management
will take all actions to make the UK business more sustainable, continued challenges
due to adverse currency movement of GBP (versus USD and EUR) as also the
unrelenting Chinese imports into the UK may force the company to undertake
further asset right-sizing in near future. TSE has recently announced further
refocusing of specialty and bar business on high-value market as it is unable to
compete with commodity grade imports; this will lead to 720 redundancies in the
UK.
Exhibit 2: Energy cost
Source: MOSL, Company
Challenges in UK pension scheme: Modified package for employees
The British Steel Pension Scheme (BSPS) is the largest defined benefit scheme within
Tata Steel Europe’s (TSE) portfolio. High number of pensioners (compared with
active employees) poses a significant challenge. Historically low interest rates in the
UK have significantly increased the valuation placed on the BSPS’s liabilities since
the last actuarial valuation in 2011, leading to a greatly increased funding deficit.
This along with difficult business conditions in UK, TSE has convinced unions to
recommend a modified pension package to employees. The acceptance by
employees is awaited. Over the last six years TSE has added ~USD2b in liability on
account of pension revaluation.
25 July 2015
3

Tata Steel
Exhibit 3: Midpoint of range of rates (%)
Exhibit 4: Net obligation (INR m) increase on rates’ volatility
Source: MOSL, Company
Source: MOSL, Company
India mining: Clarity, but the overall tax rates rise to 79%
While MMDRA Act 2015 has paved the way for clarity on captive mining in India, the
landed cost of minerals will increase—royalties were raised from 10% to 15%. The
act provides for additional levies, i.e., District Mineral Foundation (DMF) levy upto
100% of royalties and National Mineral Exploration Trust levy at 2% of royalties. The
overall tax increases to 79%. Although we don’t dispute the estimate of tax rate, it
remains function of spread between iron ore prices and mining cost.
Noamundi, Katamati,
Sukinda and Malda renewal
still pending.
Tata Steel has executed mining leases for all its iron ore mines except Katamati and
Noamundi. The Odisha government has been trying to link Katamati mine with
Kalinganagar (KPO) steel plant. A decision on Sukinda (Ferro-chrome) and Malda
(Manganese) mines is still awaited. Noamundi and Sukinda are operating under
express order.
India: Volumes to get boost—all clear for KPO’s take-off in 2HFY16
KPO has now received all statutory clearances. Coke oven heating started in the
second week of May and commercial production is expected to start in 2HFY16. KPO
will drive volume growth over the next couple of years. INR209b has been spent by
the end of FY15. The project debt increased INR50b to INR70b. INR6.5b of interest
cost was capitalized, while the total capex during the year was INR81b for Tata steel
India (TSI).
Nat Steel: Badly affected; steel making idled; focus on value addition
Flood of steel exports from China into the region squeezed the spreads between
scrap and rebar prices. As a result, revenues declined 26% and PAT of INR430m
turned in loss before tax of INR8.2b. There is a strategic shift from purchasing scrap
to billets for re-rolling by idling steel making. Focus has now shifted to re-rolling and
value addition.
Thailand: Margins under pressure, but better working capital management
Intense competition from China squeezed EBITDA to INR710m in FY15 from
INR1.93b in FY14. There was a release of Baht 1 billion on better working
management
25 July 2015
4

Tata Steel
Free cash flow negative once again
Net additional borrowings of INR53b
Exhibit 5: Cash Flow Statement (Consolidated)
Y/E March
EBITDA
Reconciliation income (loss)
(Inc)/Dec in Wkg. Cap.
Tax Paid
Other operating activities
CF from Op. Activity
(Inc)/Dec in FA + CWIP
Free Cash Flow
(Pur)/Sale of Investments
Acquisition in subsidiaries
Int. & Divident Income
others
CF from Inv. Activity
Equity raised/(repaid)
Debt raised/(repaid)
Dividend (incl. tax)
Interest & equiv. paid
CF from Fin. Activity
(Inc)/Dec in Cash
Add: opening Balance
Closing Balance
2011
159,956
8,773
-71,749
-32,351
64,629
-104,160
-39,531
17,505
-647
3,518
46,531
-37,254
45,568
37,874
-7,146
-31,366
44,930
72,305
67,878
140,183
2012
124,168
13,603
11,590
-36,524
112,838
-121,360
-8,523
78,503
6,194
-11,343
-48,006
6,045
-39,803
-11,639
-37,646
-83,043
-18,212
140,183
121,972
2013
123,212
4,424
31,293
-25,690
133,239
-154,715
-21,476
29,484
-1,557
3,576
-5,352
-128,564
2,646
25,153
-13,590
-34,657
-20,448
-15,772
121,972
106,200
2014
164,110
10,172
-12,696
-30,127
INR million
2015
127,758
11,797
3,514
-24,270
WC increased by INR38b in
TSI and released by INR41b
in subsidiaries
Capex declined because of
TSI; capex in subsidiaries
remained strong at INR66b.
INR27b raised by sale of
assets
INR42b Debt raised
Interest payments jumped
Cash & equivalent declined
by INR12b
131,459
118,798
-164,201
-134,924
-32,742
-16,126
-3,829
48,404
-1
-1,081
3,519
3,379
29,436
-19,888
-135,075
-104,109
156
167
58,658
42,119
-9,244
-11,520
-39,424
-56,938
10,146
-26,172
6,529
-11,483
106,200
112,729
112,729
101,246
Source: MOSL, Company
Net Debt stable, but seeking shareholders’ approval for capital issue
Consolidated net debt has remained stable largely due to disposal of subsidiaries
and JVs along with their respective debts.
Despite debt rising INR42b
and cash reducing by
INR12b, net debt remained
stable, helped by disposal
of subsidiaries and JV along
with respective debts.
Exhibit 6: Net Debt (Consolidated)
Y/E March
Hybrid Perpetual Securities
Pref. Shares
Borrowings (LT+ST)
Acceptances
Current part of LT debt
Gross Debt
Less: cash
Less: current investment
Net Debt
2011
15,000
530,451
13,413
75,319
634,184
108,591
31,593
494,001
2012
22,750
224
499,373
22,086
98,596
643,029
107,988
13,984
521,057
2013
22,750
212
549,722
20,014
110,009
702,707
98,597
7,603
596,508
2014
22,750
200
683,926
INR million
2015
22,750
200
693,039
130,929
112,898
837,805
828,887
86,045
87,499
26,684
13,746
725,076
727,641
Source: MOSL, Company
Net debt in TSI increased on
working capital increase of
INR38b
Exhibit 7: Net Debt (TSI)
Y/E March
Hybrid Perpetual Securities
Borrowings (LT+ST)
Current part of LT debt
Gross Debt
Less: cash
Less: current investment
Net Debt
2011
15,000
246,482
36,529
298,011
41,388
29,998
226,626
2012
22,750
214,188
47,534
284,473
39,470
12,042
232,961
2013
22,750
236,365
38,713
297,828
22,181
4,340
271,307
INR million
2014
2015
22,750
22,750
238,518
239,353
40,655
42,632
301,923
304,734
9,612
4,786
23,432
10,001
268,879
289,948
Source: MOSL, Company
25 July 2015
5

Tata Steel
INR100b capital issue
In the upcoming AGM on August 12, 2015, Tata steel will seek shareholders’ blanket
approval for virtually any/every kind of debt, equity and/or hybrid instruments to
raise INR100b to strike a balance between growth and stability of balance sheet.
Exhibit 8: Debt maturity profile
USD7b refinancing has
pushed back the maturity,
yet repayments in FY16 are
high.
Source: MOSL, Company
Net worth hurt by
impairment, actuarial and
business loss in TSE & OS.
Exhibit 9: Net worth bridge (INR billion)
Source: MOSL, Company
25 July 2015
6

Tata Steel
Tata Steel India
Finance cost, RM & wage bill spike; working capital increase
TSI’s sales increased 3% to 8.75mt, helped by focus on value-added production
despite the challenging demand environment. Auto segment sales increased by
200kt to 1.37mt, Tiscon by 140kt to 1.23mt, Tata Shaktee by 20kt to 230kt and
Durashine by 20% to 100kt; the share of LPG increased from 23% to 36% in India.
Closure of iron ore mines posed significant challenges. Nearly 5.2mt was purchased
from domestic sources and imports. As a result, the average cost of iron ore in per
ton of steel sold increased by INR1870/t to INR4193/t (excluding royalties, DMF,
etc.). To bridge the shortfall in metallics, TSI purchase INR458.6m worth of
pig/sponge iron during the year. Under the ongoing improvement program Kar Vijay
Har Shikhar (KVHS), savings of more than INR18b have been achieved.
Exhibit 10: Operational results and costing
Revenues (INR m)
Sales (m tons)
A. Realization (INR/ton)
Expenditure (INRs m)
Variable Costs (INR m)
B. Variable costs (INR/tss) (i+ii+iii)
(i) Raw material cost (INR/tss)
Iron ore (INR/tss) (a x b)
(a) Cost (INR/ton)
(b) Spec. cons.(tons/tss)
Coking coal (INR/tss) (c x d)
(c) Cost (INR/ton)
(d) Spec. cons.(tons/tss)
Others (Rs/tss)
(ii) Power & Fuel (INR/tss)
(iii) Other exp. (INR/tss)
Contribution Margin (Rs/tss) (A - B)
Fixed Costs (Rs m) (i+ii+iii)
fixed cost per ton
(i) Staff costs (INR m)
(ii) Stores & spare (INR m) (only 50%)
(iii) Others (INR m)
EBITDA (INR m)
EBITDA per ton (INR)
EBITDA per ton (USD)
FY09
243,158
5.2
46,383
151,823
102,082
18,282
11,821
962
529
1.8
7,917
7,548
1.05
2,942
2,332
4,129
28,101
49,741
9,488
23,058
6,244
20,440
91,334
17,422
379
FY10
250,220
6.2
40,563
160,699
106,979
16,811
10,705
1,073
592
1.8
6,855
7,018
0.98
2,777
2,243
3,863
23,753
53,720
8,709
23,615
6,677
23,429
89,521
14,512
306
FY11
293,964
6.4
45,832
179,141
119,758
19,017
11,951
1,398
764
1.8
7,309
7,357
0.99
3,243
2,430
4,636
26,815
59,383
9,258
28,375
7,086
23,922
114,823
17,902
392
FY12
339,335
6.6
51,174
223,967
150,989
23,651
15,233
1,815
988
1.8
9,979
10,177
0.98
3,439
3,001
5,416
27,523
72,978
11,006
30,473
8,467
34,038
115,368
17,398
363
FY13
381,994
7.5
51,028
270,732
189,928
25,769
16,269
2,333
NA
NA
10,076
NA
NA
3,860
3,353
6,147
25,259
80,804
10,794
36,085
10,454
34,264
111,262
14,863
273
INR million
FY14
FY15
417,110
417,850
8.5
8.7
48,980
47,776
288,941
317,762
200,056
212,490
23,492
24,296
14,352
15,857
2,322
4,193
NA
NA
NA
NA
8,075
7,807
NA
NA
NA
NA
3,955
3,857
3,255
3,092
5,884
5,346
25,488
23,480
88,886
105,272
10,437
12,037
36,731
46,019
13,056
11,527
39,099
47,725
128,169
100,088
15,050
11,444
249
187
Source: Company/MOSL
Cost of RM may ease by
INR4000/t
Cost of coking coal has been on the decline due to falling coking coal prices in the
international market. According to our calculations, coking coal cost should correct
by another INR2175 per ton of saleable steel once high-cost inventory is purged out
of system. Thus, a total of INR4000 per ton of saleable steel correction is expected in
raw material costs.
Staff cost increased 25% YoY to INR46b, driven by higher provision toward pension
and staff welfare. The discount rate changed from 9.25% to 7.75%, thus leading to
actuarial loss of INR2.22b. Average salary (including bonus) was up 8% to
Sharp increase in wages
25 July 2015
7

Tata Steel
INR965,679 pa. Including the retirement and welfare benefits, the average cost of
an employee to company increased by 23% to INR1.25m pa.
Finance cost rising
Exhibit 11: Average finance cost (%) for TSI
Source: MOSL, Company
Average finance cost has jumped from 7.7% in FY14 to 9.1% in FY15 as low-cost debt
was replaced by higher-cost project debt. During the year, low-cost 4.5% INR33.8b
of FCCBs were redeemed on maturity and were replaced by high-cost project debt
for KPO. Debt for KPO has increased by INR50b to INR70b. Consequently, the
finance cost capitalized increased from INR3.1b to INR6.5b. Overall gross debt
remained stable at INR280b (excluding INR22.75b perpetual bonds). TSI also has
outstanding guarantees of INR134b to Singapore-based SPV ABJA Investments.
Exhibit 12: Capex and its funding (INR b)
Exhibit 13: Finance cost (INR b)
Source: Company, MOSL
Source: Company, MOSL
Operating cash flow shrunk
sharply due to a spike in
working capital
Net debt increased by INR21b to INR290b due to a decline in cash and current
investments. Operating cash flow shrunk sharply by INR76b to INR49b due to
INR38b spike in working capital. Capex, too, dropped sharply—from INR95b in FY14
to INR69b. Despite generation of INR12.5b cash flow by sale of assets (e.g., Borivali
land bank), cash and current investments declined by INR18.3b as INR33b (v/s
INR27b in FY14) went toward interest, dividend and tax thereon.
25 July 2015
8

Tata Steel
Tata Steel Europe
EBIT and FCF turn positive after a long time, aided by spreads & WC release
Tata Steel Europe (TSE) generated EBITDA of GBP435m. EBIT turned positive to
GBP102m after a long time, largely helped by expansion of spreads. The
management is focusing on value additions to tide over difficult times. New product
launches increased from 30 in FY14 to 35 in FY15.
Margins expanded, largely
driven by expansion of
spread.
Exhibit 14: Tata Steel Europe (USD/t)
Source: MOSL, Company
Labor productivity
improved on headcount
reduction...
Exhibit 15: Headcount and labor productivity
Source: MOSL, Company
…but, the unit cost still
increased on increase in
average wages
Exhibit 16: Profit and loss account (USD/t)
Source: Company, MOSL
25 July 2015
9

Tata Steel
Fixed cost inched up despite headcount reduction and increase in labor productivity.
TSE, along with other subsidiaries, generated positive free cash flow— largely driven
by release of inventories by INR41b.
It is a cash shredder year after year
Working capital release
helped free cash flow
Exhibit 17: Free cash flow (USD m) for TSE and other subsidiaries
Note: capex adjusted for Centennial steel, which was later merged with TSI... Source: MOSL, Company
Exhibit 18: Cash Flow Statement (TSE & other subsidiaries)
Y/E March
EBITDA
Reconciliation income (loss)
(Inc)/Dec in Wkg. Cap.
Tax Paid
Other operating activities
CF from Op. Activity
(Inc)/Dec in FA + CWIP
Free Cash Flow
(Pur)/Sale of Investments
Acquisition in subsidiaries
Int. & Divident Income
others
CF from Inv. Activity
Equity raised/(repaid)
Debt raised/(repaid)
Dividend (incl. tax)
Interest & equiv. paid
CF from Fin. Activity
(Inc)/Dec in Cash
Add: opening Balance
Closing Balance
2011
37,174
19,267
-73,592
-3,648
-20,798
-60,942
-81,740
56,609
52,474
955
33,753
82,849
103
3,632
-66
-15,267
-11,598
50,453
18,344
68,798
2012
8,800
10,682
-5,670
-3,539
10,273
-50,768
-40,495
22,494
25,420
544
750
-1,561
851
11,717
-129
-19,489
-7,050
1,663
68,798
70,460
2013
11,950
-183
16,676
-5,890
22,553
-79,630
-57,077
20,428
19,681
1,533
2,285
-35,703
2,566
37,315
-78
-17,435
22,368
9,218
70,460
79,679
2014
26,961
14,957
-29,132
-5,655
7,131
-68,710
-61,579
389
4,513
-2,329
10,607
-55,530
90
70,283
-238
-21,729
48,405
INR million
2015
16,480
16,495
41,041
-3,737
70,279
-65,698
4,581
3,539
1,168
591
-6,505
-66,905
26
38,942
-209
-35,359
3,400
WC release of INR41b
High sustenance capex
FCF turned positive,
courtesy WC release.
Debt had to be raised to…
…pay interest
7
6,774
79,679
79,685
79,685
86,459
Source: MOSL, Company
25 July 2015
10

Tata Steel
SOTP reduced by 17%
On lower-than-estimated cash generation
EPS is reduced by 5-7%
owing to the rise in finance
cost
A scrutiny of the annual report revealed that net debt was stable because of asset
sale and lower capex, while business required net additional borrowings of INR53b
due to lower-than-expected cash flow generation. Average finance cost has
increased as lower-cost debts are getting substituted by higher-cost project debt.
KPO debt has increased by INR50b to INR70b and interest capitalized has increased
from INR3.1b in FY14 to INR6.5b in FY15. As a result, we are raising the finance cost
materially (+17% to INR55b for FY17E) to account for increase in interest rates and
impact of KPO capitalization. As a result, EPS is cut by 5/7% for FY16/17E.
Capital work in progress (CWIP) was INR58b lower than our estimate of INR278b.
The variation is on account of INR21b higher capitalization at INR104b (INR30b for
TSI and INR74b for overseas subsidiary), disposal of assets, impairment (INR5.5b),
currency fluctuation, lower capex (INR25b), etc.; this has trimmed INR60/share from
our target price. Further, the value of investment has corrected by 20% to INR76b
due to a fall in stock prices of Tata motors and Titan. As a result, the SOTP value is
reduced by 17% to INR362/share. Maintain BUY
Lower-than-estimated
generation of cash flow
reflected in CWIP by way of
capex cut rather than net
debt
Exhibit 19: Sum-of-parts-valuation
2013
India
EBITDA per ton (USD)
Sales (m tons)
EBITDA-India
Target EBITDA multiple
EV (India) - (a)
INR/share
TSE and other subs.
EBITDA per ton (USD)
Depreciation per ton (USD)
EBIT per ton (USD)
Sales (m tons)
EBIT
Target EV/EBIT multiple
EV (TSE) - (b)
INR/share
Target EV (c=a+b)
Net Debt (d)
INR/share
D/E x (adj for goodwill)
CWIP (e)
INR/share
(d1) Discount (%)
Investments (f)
INR/share
(d2) Discount (%)
TP (c-d+e*(1-d1)+f*(1-d2))
Target Price (INR /share)
263
7.5
113,232
5.5
622,778
641
11
43
-32
16.7
-29,370
7.0
-205,588
-212
417,190
596,508
614
2.8
2014
234
8.5
128,169
5.5
704,930
726
33
36
-3
18.0
-3,184
7.0
-22,289
-23
682,641
725,076
746
2.9
2015
186
8.7
100,088
6.5
650,572
670
26
37
-11
17.6
-11,791
7.0
-82,534
-85
568,038
727,641
749
4.1
278,502
287
2016E
156
9.3
95,388
6.5
620,024
638
42
34
8
18.0
8,833
7.0
61,829
64
681,853
757,530
780
4.0
105,502
109
76,369
79
20
90,921
94
2017E
199
11.2
145,383
6.0
872,298
898
49
34
14
18.0
16,459
7.0
115,212
119
987,510
759,350
782
3.3
62,502
64
76,369
79
20
351,757
362
2016E
156
9.3
95,388
6.5
620,024
638
42
34
8
18.0
8,833
7.0
61,829
64
681,853
762,358
785
4.1
213,781
220
95,135
98
20
209,384
216
Rev. (%)
2017E
199
11.2
145,383
6.0
872,298
898
49
34
14
18.0
16,459
7.0
115,212
119
987,510
762,044
784
3.3
120,781
124
Rev. (%)
-1
-1
-51
-51
-20
-20
-57
-57
0
0
-48
95,135
98
-20
20
422,355
435
-17
Source: MOSL
25 July 2015
11

Tata Steel
Risks to our estimates
Contrary to our expectation, the margin outlook for TSI is deteriorating instead of
stabilizing. Steel prices have fallen by another 10% in just one month; if all this flows
into a similar correction in realization for Tata steel, we will have to reduce our
estimates correspondingly. Since the balance sheet is highly leveraged, the impact
on equity value is magnified.
Shrinking spreads pose risk
to our estimates
Exhibit 20: Indian spreads (Import parity HRC - coking coal) - INR/t
Source: MOSL
25 July 2015
12

Tata Steel
Financials and valuations
Income Statement (Consolidated)
Y/E March
Net Sales
Change (%)
EBITDA
% of Net Sales
Depn. & Amortization
EBIT
Finace cost
Other income
PBT before EO
EO income
PBT after EO
Tax
Rate (%)
Reported PAT
Minority interest P/L
Share of asso. PAT
PAT (After MI & asso.)
Div. on Pref. /Hybrid Sec.
Adjusted PAT
Change (%)
2011
1,187,531
16.0
159,956
13.5
44,148
115,808
27,700
2,809
90,917
30,103
121,020
32,459
26.8
88,561
-603
664
89,827
59,724
-n/a-
2012
1,328,997
11.9
124,168
9.3
45,167
79,001
42,501
15,730
52,231
33,619
85,850
36,365
42.4
49,485
-1,731
2,681
53,898
2,225
18,054
-69.8
2013
1,347,115
1.4
123,212
9.1
55,753
67,459
39,681
4,792
32,569
-73,899
-41,330
32,294
-78.1
-73,624
-2,145
903
-70,576
1,798
1,524
-91.6
2014
1,486,136
10.3
164,110
11.0
58,412
105,698
43,368
5,168
67,498
-1,418
66,080
30,582
46.3
35,499
-80
-718
34,860
1,798
34,479
2,162.2
2015
1,395,037
-6.1
127,758
9.2
59,436
68,322
48,478
7,962
27,806
16,615
44,421
23,380
52.6
21,040
-450
-301
21,189
1,798
2,776
-91.9
2016E
1,311,846
-6.0
143,175
10.9
62,281
80,894
47,666
6,289
39,517
39,517
18,977
48.0
20,540
-144
516
21,201
1,798
19,403
598.9
(INR Million)
2017E
1,426,598
8.7
202,392
14.2
73,021
129,371
54,673
6,022
80,719
80,719
27,618
34.2
53,102
-74
537
53,713
1,798
51,915
167.6
Balance Sheet (Consolidated)
Y/E March
Share Capital
Reserves
Net Worth
Minority Interest
Total Loans
Deferred Tax Liability
Capital Employed
Gross Block
Less: Accum. Deprn.
Net Fixed Assets
Capital WIP
Investments
Goodwill on consolidation
Curr. Assets
Inventory
Account Receivables
Cash & liquid investment
Others
Curr. Liability & Prov.
Account Payables
Provisions & Others
Net Current Assets
Appl. of Funds
E: MOSL Estimates
2011
9,587
346,226
355,814
8,889
634,184
20,126
1,019,013
981,023
615,338
365,685
135,508
46,881
152,982
652,071
240,552
148,119
140,183
123,216
334,114
171,162
162,952
317,957
1,019,013
2012
9,714
416,623
426,337
10,912
643,029
24,424
1,104,701
1,133,047
712,043
421,003
200,280
26,229
173,546
646,849
255,980
148,785
121,972
120,112
363,205
183,200
180,006
283,644
1,104,701
2013
9,714
332,008
341,722
16,694
702,707
31,185
1,092,308
1,352,650
798,379
554,271
137,862
24,974
130,650
620,943
240,912
139,940
106,200
133,892
376,391
197,774
178,617
244,552
1,092,308
2014
9,714
395,606
405,320
17,377
837,805
25,550
1,286,052
1,570,087
969,844
600,242
259,564
24,251
157,488
674,492
268,800
160,058
112,729
132,906
429,985
229,129
200,856
244,508
1,286,052
2015
9,714
303,780
313,494
17,039
828,887
28,618
1,188,037
1,520,384
965,176
555,208
278,502
20,804
134,075
600,639
251,499
133,099
101,246
114,796
401,191
191,899
209,292
199,448
1,188,037
2016E
9,714
311,840
321,554
16,894
869,380
29,084
1,236,912
1,814,118
1,027,457
786,661
105,502
20,804
134,075
586,055
215,646
143,764
111,850
114,796
396,185
186,893
209,292
189,870
1,236,912
(INR Million)
2017E
9,714
353,916
363,630
16,820
889,380
29,831
1,299,661
1,959,618
1,100,479
859,139
62,502
20,804
134,075
635,674
234,509
156,340
130,029
114,796
412,534
203,241
209,292
223,140
1,299,661
25 July 2015
13

Tata Steel
Financials and valuations
Ratios (Consolidated)
Y/E March
Basic (INR)
EPS
Cash EPS
BV/Share
DPS
Payout (%)
Valuation (x)
P/E
Cash P/E
P/BV
EV/Sales
EV/EBITDA
Dividend Yield (%)
Return Ratios (%)
EBITDA Margins (%)
Net Profit Margins (%)
RoE
RoCE (pre-tax)
RoIC (pre-tax)
Working Capital Ratios
Fixed Asset Turnover (x)
Asset Turnover (x)
Debtor (Days)
Inventory (Days)
Payables (Days)
Working Capital T/O (Days)
Growth (%)
Sales
EBITDA
PAT
Leverage Ratio (x)
Current Ratio
Interest Cover Ratio
Net Debt/Equity
E: MOSt Estimates
2011
62.3
138.3
211.4
12.0
21.9
4.3
1.9
1.3
0.6
4.7
4.5
13.5
5.0
40.5
13.2
18.2
3.2
1.2
45.5
73.9
52.6
66.9
16.0
98.9
-823.5
2.0
4.2
2.4
2012
18.6
97.4
260.2
12.0
74.6
14.3
2.7
1.0
0.6
6.3
4.5
9.3
1.4
7.9
9.2
10.9
3.2
1.2
40.9
70.3
50.3
60.9
11.9
-22.4
-69.8
1.8
1.9
2.1
2013
1.6
-18.4
217.3
8.0
886.5
168.9
-14.4
1.2
0.6
6.9
3.0
9.1
0.1
0.7
6.7
8.5
2.4
1.2
37.9
65.3
53.6
49.6
1.4
-0.8
-91.6
1.6
1.7
2.8
2014
35.5
96.7
255.1
8.0
39.2
7.5
2.7
1.0
0.7
6.0
3.0
11.0
2.3
15.0
9.3
12.3
2.5
1.2
39.3
66.0
56.3
49.1
10.3
33.2
2162.2
1.6
2.4
2.9
2015
2.9
82.8
184.7
8.0
486.8
92.7
3.2
1.4
0.7
7.7
3.0
9.2
0.2
1.3
6.1
8.1
2.5
1.2
34.8
65.8
50.2
50.4
-6.1
-22.2
-91.9
1.5
1.4
4.1
2016E
20.0
85.3
193.0
8.0
75.5
13.3
3.1
1.4
0.8
7.1
3.0
10.9
1.5
10.6
7.2
9.1
1.7
1.1
40.0
60.0
52.0
48.0
-6.0
12.1
598.9
1.5
1.7
4.0
2017E
53.4
129.8
236.3
8.0
28.2
5.0
2.0
1.1
0.7
5.0
3.0
14.2
3.6
24.9
10.7
12.4
1.7
1.1
40.0
60.0
52.0
48.0
8.7
41.4
167.6
1.5
2.4
3.3
Cash Flow Statement (Consolidated)
Y/E March
EBITDA
(Inc)/Dec in Wkg. Cap.
Tax Paid
CF from Op. Activity
(Inc)/Dec in FA + CWIP
Free Cash Flow
(Pur)/Sale of Investments
Acquisition in subsidiaries
Int. & Divident Income
CF from Inv. Activity
Dividend (incl. tax)
Interest & equiv. paid
CF from Fin. Activity
(Inc)/Dec in Cash
Add: opening Balance
Closing Balance
2011
159,956
-71,749
-32,351
64,629
-104,160
-39,531
17,505
-647
3,518
-37,254
-7,146
-31,366
44,930
72,305
67,878
140,183
2012
124,168
11,590
-36,524
112,838
-121,360
-8,523
78,503
6,194
-48,006
-11,639
-37,646
-83,043
-18,212
140,183
121,972
2013
123,212
31,293
-25,690
133,239
-154,715
-21,476
29,484
-1,557
3,576
-128,564
-13,590
-34,657
-20,448
-15,772
121,972
106,200
2014
164,110
-12,696
-30,127
131,459
-164,201
-32,742
-3,829
-1
3,519
-135,075
-9,244
-39,424
10,146
6,529
106,200
112,729
2015
127,758
3,514
-24,270
118,798
-134,924
-16,126
48,404
-1,081
3,379
-104,109
-11,520
-56,938
-26,172
-11,483
112,729
101,246
2016E
143,175
20,183
-18,511
144,847
-101,765
43,082
2017E
202,392
-15,091
-26,870
160,431
-102,500
57,931
6,289
-95,476
-9,302
-49,464
-38,767
10,604
101,246
111,850
6,022
-96,478
-9,302
-56,472
-45,774
18,179
111,850
130,029
25 July 2015
14

Tata Steel
NOTES
25 July 2015
15

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Tata Steel
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addition MOSL is not a registered investment adviser under the U.S. Investment Advisers Act of 1940, as amended (the "Advisers Act" and together with the 1934 Act, the "Acts), and under applicable state laws in the
United States. Accordingly, in the absence of specific exemption under the Acts, any brokerage and investment services provided by MOSL, including the products and services described herein are not available to or
intended for U.S. persons.
This report is intended for distribution only to "Major Institutional Investors" as defined by Rule 15a-6(b)(4) of the Exchange Act and interpretations thereof by SEC (henceforth referred to as "major institutional
investors"). This document must not be acted on or relied on by persons who are not major institutional investors. Any investment or investment activity to which this document relates is only available to major
institutional investors and will be engaged in only with major institutional investors. In reliance on the exemption from registration provided by Rule 15a-6 of the U.S. Securities Exchange Act of 1934, as amended (the
"Exchange Act") and interpretations thereof by the U.S. Securities and Exchange Commission ("SEC") in order to conduct business with Institutional Investors based in the U.S., MOSL has entered into a chaperoning
agreement with a U.S. registered broker-dealer, Motilal Oswal Securities International Private Limited. ("MOSIPL"). Any business interaction pursuant to this report will have to be executed within the provisions of this
chaperoning agreement.
The Research Analysts contributing to the report may not be registered /qualified as research analyst with FINRA. Such research analyst may not be associated persons of the U.S. registered broker-dealer, MOSIPL,
and therefore, may not be subject to NASD rule 2711 and NYSE Rule 472 restrictions on communication with a subject company, public appearances and trading securities held by a research analyst account.
Motilal Oswal Capital Markets Singapore Pte Limited is acting as an exempt financial advisor under section 23(1)(f) of the Financial Advisers Act(FAA) read with regulation 17(1)(d) of the Financial Advisors
Regulations and is a subsidiary of Motilal Oswal Securities Limited in India. This research is distributed in Singapore by Motilal Oswal Capital Markets Singapore Pte Limited and it is only directed in Singapore to
accredited investors, as defined in the Financial Advisers Regulations and the Securities and Futures Act (Chapter 289), as amended from time to time.
In respect of any matter arising from or in connection with the research you could contact the following representatives of Motilal Oswal Capital Markets Singapore Pte Limited:
Kadambari Balachandran
Email : kadambari.balachandran@motilaloswal.com
Contact : (+65) 68189233 / 65249115
Office Address : 21 (Suite 31),16 Collyer Quay,Singapore 04931
For Singapore
Motilal Oswal Securities Ltd
25 July 2015
Motilal Oswal Tower, Level 9, Sayani Road, Prabhadevi, Mumbai 400 025
Phone: +91 22 3982 5500 E-mail: reports@motilaloswal.com
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