We remain ?overweight? on Tata Steel with a June 2015 target price of R645 a share. The stock is trading at 4.4x FY16e EV/Ebitda (adjusted for CWIP) and at 5.4x without adjustments. The stock has underperformed global and regional peers over the last few months and, with news flow expected to improve, it is a good entry opportunity.
The currency depreciation in both euro and GBP is broadly positive for Tata Steel, as European steel prices inch up and, given the high local currency fixed costs, margins would expand in local currency terms on a net basis. On a translation basis (into $ and R), some of the positive impact would be negated, but it?s a net positive.
Further, European steel prices have increased even as Chinese HRC export prices have been steady. While seasonality is also at play, currency depreciation has been supportive as it reduces pressure from Chinese steel imports. Spot iron ore prices have been falling. Given the cascading impact of the mineral ban across companies, we expect the mining stoppage to be short lived and should be resolved in the coming weeks via a stop-gap order.
The company sources ~20% iron ore from Jharkhand and, as long as the ban stays for less than 2 months, we see little financial impact.
As the festival season starts, local steel demand should improve in India, driving steel prices higher locally. The much-awaited cyclical steel demand recovery should also start over the coming months.
JPMorgan
