8/8/2019 Tata Sponge 080910

1/2

CMP Rs352, Target Rs413

Tata Sponge Iron - BUY

Company Report September 08, 2010

Sector: Metals & Mining

Sensex: 18,645

CMP (Rs): 352

Target price (Rs): 413

Upside (%): 17.2

52 Week h/l (Rs): 415 / 215

Market cap (Rscr) : 542

6m Avg vol (000Nos): 69

No of o/s shares (mn): 15

FV (Rs): 10

Bloomberg code: TTSP IB

Reuters code: TTSP.BO

BSE code: 513010

NSE code: TATASPONGE

Prices as on 07 Sep, 2010

Shareholding pattern

June '10 (%)

Promoters 43.7

Institutions 13.3

Non promoter corp hold 6.1

Public & others 36.9

Performance rel. to sensex

(%) 1m 3m 1yr

Tata Sponge 6.9 5.9 40.2

Godawari Power (6.7) (7.7) 43.9

Adhunik Metaliks 2.4 (0.3) 1.4

Prakash Ind. (0.2) 3.7 (1.0)

Share price trend

0

100

200

Sep-09 Jan-10 May-10 Sep-10

Tata Sponge Sensex

Research Analyst

Tarang Bhanushaliresearch@indiainfoline.com

Sponge iron prices to remain firm Sponge iron prices have commenced their ascent over the last twomonths led by an uptick in scrap prices globally and rising input

costs. Over H1 2010, the spread between scrap and sponge iron

widened to ~5,000/ton; this is expected to decline going ahead.Following the rise in Chinese domestic steel prices, scrap prices toohave moved higher over the last one month. We expect sponge ironprices to gain further momentum as demand for long products risespost monsoon. We estimate average sponge iron prices to be~Rs16,500/ton in FY11 and FY12.

Surplus power sales to boost bottomlineTata Sponge has 3 sponge iron kilns of 0.13mtpa each and twowaste heat recovery power plants with a combined capacity of

26MW. Over the last two years, it has sold ~69% (125mn units) oftotal power produced to the grid. We expect power sales to increase

to 128mn units in FY11 and 139mn units in FY12 on the back of

higher utilization rates. We expect average power realisations ofRs3.5/unit and revenues of Rs451mn in FY11 and Rs491mn in FY12.

Assured raw material to lead to smooth operationsTSILs strategic tie up with Tata Steel secures its future iron orerequirement. 100% of TSILs iron ore demand is met by Tata SteelsKhondbond Mine, Orissa. The mine is 25kms away from the plantand contains 65% Fe content reserves. Currently, TSIL buys ~70%of its coal requirement from Coal India and the rest is eitherimported or procured through e-auction. The company has been

jointly allotted a coal block at Talcher, with estimated reserves of120mn tons where it owns ~45% stake. It has already acquired landand deposited Rs975mn with the Orissa Government in FY10. Weexpect production to commence from FY13. We believecommencement of the coal mine would be a trigger for the stock asit would lead to savings of ~Rs1,000/ton of coal.

Valuations compelling; recommend BUYWith steady cash flows, we expect cash per share to rise from Rs60.5in FY10 to Rs145 in FY12. With raw material linkages alreadyestablished, we believe TSIL should post profit CAGR of 11% overFY10-12E. At the CMP of Rs334, the stock is trading at 2x FY12E

EV/EBIDTA and at a FY12E P/B of 0.9x, which is at a steep discountto its peers. We expect the stock to move higher in the near term assteel prices have firmed up and valuation gap narrows. We

recommend a BUY with a price target of Rs413.Valuation summary

Y/e 31 Mar FY09 FY10 FY11E FY12E

Revenues (Rs m) 6,081 5,200 6,031 6,218

yoy growth (%) 33.2 (14.5) 16.0 3.1

OPM (%) 30.3 23.8 24.2 25.1

Reported PAT (Rs m) 1,207 845 976 1,042

yoy growth (%) 26.3 (30.0) 15.4 6.8

EPS (Rs) 78.4 54.9 63.4 67.7

P/E (x) 4.5 6.4 5.6 5.2

Price/Book (x) 1.6 1.3 1.1 0.9EV/EBITDA (x) 2.3 3.6 2.5 2.0

RoE (%) 40.7 22.0 21.1 19.0

RoCE (%) 47.6 29.2 28.7 26.2Source: Company, India Infoline Research

8/8/2019 Tata Sponge 080910

2/2

Recommendation parameters for fundamental reports:

Buy Absolute return of over +10%

Market Performer Absolute return between -10% to +10%

Sell Absolute return below -10%

Published in 2010. India Infoline Ltd 2010

This report is for the personal information of the authorised recipient and is not for public distribution and should not be reproduced or redistributedwithout prior permission.

The information provided in the document is from publicly available data and other sources, which we believe, are reliable. Efforts are made to try

and ensure accuracy of data however, India Infoline and/or any of its affiliates and/or employees shall not be liable for loss or damage that mayarise from use of this document. India Infoline and/or any of its affiliates and/or employees may or may not hold positions in any of the securities

mentioned in the document.

The report also includes analysis andviews expressed by our research team. The report is purely for information purposes and does not construe to

be investment recommendation/advice or an offer or solicitation of an offer to buy/sell any securities. The opinions expressed are our current

opinions as of the date appearing in the material and may be subject to change from time to time without notice.

Investors should not solely rely on the information contained in this document and must make investment decisions based on their own investmentobjectives, risk profile and financial position. The recipients of this material should take their own professional advice before acting on thisinformation.

India Infoline and/or its affiliate companies may deal in the securities mentioned herein as a broker or for any other transaction as a Market Maker,

Investment Advisor, etc. to the issuer company or its connected persons.

This report is published by IIFL India Private Clients research desk. IIFL has other business units with independent research teams separated by'Chinese walls' catering to different sets of customers having varying objectives, risk profiles, investment horizon, etc and therefore, may at times

have, different and contrary views on stocks, sectors and markets.

IIFL,IIFL Centre, Kamala City, Senapati Bapat Marg, Lower Parel (W), Mumbai 400 013.

For Research related queries, write to: Amar Ambani, Head of Research at amar@indiainfoline.com or research@indiainfoline.comFor Sales and Account related information, write to customer care: info@5pmail.com or call on 91-44 4007 1000