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Rs.497
Target Price: Rs.800
Tata Sponge Iron Ltd
Potential Upside:61%
Absolute Rating: BUY
Iron & Steel/ Intermediary
09th June 2015
| For private circulation only
Tata Sponge Iron Ltd (TSP) is on of our high convection stocks:
The stock price of TSP has corrected about 59% from its 52-week High. This provides a lot of comfort on price point;
Its net cash (as of March 2015) stands at Rs.459 crore, which is Rs.298/ per share and ~59% of its market cap;
The prices of iron ore, which is its core input are expected to remain subdued in the medium to long term;
The sponge iron industry has been going through the process of consolidation in terms of small players being thrown out of the industry due to
inefficiency in their operations;
Profile: Part of Tata Group. TSP has 26MW of two captive power units based on waste heat recovery, which enables the company to reduce ‘Power &
Fuel’ cost and aided operating margins and thereby survived the difficult times in the industry;
Iron Ore prices to remain subdued
CIBC, one of the most reputed research houses, provides quite interesting outlook on iron ore. It expects Iron Ore prices to remain subdued in the
medium to long terms – it expects price to improve to $63 a tonne in 2016 but remain at more or less same level in 2017. During the years
2016 and 2017, it is expected to be 36% lower than 2014-average price and about 59% lower than recent peak price of around $150 a tonne.
This will lead to lower raw material cost for TSP, which will further improve the margins going forward;
Stock Data
Market cap
: Rs 782cr
52 week high/low
: Rs 1203/ 503
Avg. daily vol. (3mth)
: 1,21,817
BSE code
: TATASPONGE
NSE code
: TATASPONGE
Shareholding (%)
:
54.50
54.50
FIIs
:
10.37
4.31
DIIs
:
1.00
1.00
Others
:
34.13
40.19
Tata Sponge Iron Ltd.
305
Commodity
Unit
2014
2015(f)
2016(f)
2017(f)
Iron Ore (62% Fe)
$/mt
97
59
63
62
Source: CIBC
The government's continued thrust on development of infrastructure and manufacturing will help steel demand in the country to grow. Besides,
higher support for the housing sector is a step in the positive direction. It is expected the steel sector will grow 6.2% in 2015-16, against 4.3% in April
2014-February 2015. Owing to this, production of sponge iron is likely to grow 6.4% in 2015-16;
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255
Equinomics Research & Advisory Private Limited - Investment Adviser
Sensex (Both on scale of
100)
205
155
105
Source: Equinomics, BSE
J-12
A-12
O-12
D-12
F-13
A-13
J-13
S-13
N-13
J-14
M-14
M-14
J-14
S-14
D-14
F-15
A-15
55
Government’s continued thrust on Development of Infrastructure and Manufacturing will help review demand and production
Mar-15 Dec-14
Promoters
STOCK RISK PROFILE
INVESTMENT HORIZON
LOW
1 -2 YEAR
Founder & Managing Director
Mr. G. Chokkalingam , chokka.g@equinomics.in
Investment Rationale Cont…
Weak steel market, iron prices trampled Q4 Performance
Net profit of Tata Sponge Iron declined 78.8% to Rs.8.57 crore in the quarter ended March 2015 as against Rs.40.50 crore during the previous quarter ended March 2014. Sales declined 30%
to Rs.159.85 crore in the quarter ended March 2015 as against Rs.228.36 crore during the previous quarter ended March 2014, impacted by sluggish steel market and sponge iron ore prices.
For the full year, net profit declined 9.14% to Rs.91.94 crore in the year ended March 2015 as against Rs.101.19 crore during the previous year ended March 2014. Sales rose 0.46% to
Rs.766.23 crore in the year ended March 2015 as against Rs.762.72 crore during the previous year ended March 2014;
Sponge iron demand expected to revive aided by the new Foreign Trade Policy
With the import of ferrous scrap coming to a standstill as in the new Foreign Trade Policy (effective April 1), the government made mandatory videography of loading of scrap containers in
the source country which according to importers is impossible. As such, the entire quantity of about 10 million tonnes (mt) of steel scrap import is likely to be affected. Hence demand
for sponge iron is expected to revive in the coming weeks, once existing stocks of scrap are exhausted;
Possible Productive Usage of cash pile
Tata Sponge’s net cash (as of March 2015) stands at Rs.459 crore (~Rs.298/share, 59% of marketcap). We believe that the management may consider options for deploying cash such
as i) additional sponge iron capacity (EC approval of 2 additional sponge iron kilns exists), ii) pellet making capacities and iii) downstream facilities in steelmaking (TMT);
Outlook & Valuations
Ongoing coal auctions and likely auctions of iron ore mines in FY2016E (as per new MMDR policy) would provide opportunity for TSP to secure captive coal and iron ore mines without large
upfront investment and we believe the company will see larger fall in raw material costs vis-à-vis sponge iron prices thereby providing support to margins and hence, expect smart recovery in
EBITDA in FY2016E/17E. At the current market price of Rs.496 the stock trades at 6.2x its FY2017E EPS of Rs.80/. We firmly believe that the prospects of sponge iron industry would
improve substantially within 18 months and hence, we reiterate our ‘BUY’ on the stock with a target price of Rs.800, a potential upside of 61% from the current market price.
Financial Summary (Consolidated)
Net Sales
(Rs Cr)
Change
(%)
PAT
(Rs Cr)
Change
(%)
EPS
(Rs)
Change
(%)
P/E
(x)
FY14
763.00
-1.7
101.00
18.4
65.7
18.3
7.5
FY15
766.00
0.3
92.00
-8.9
59.7
-9.1
8.3
FY16E
845.00
10.3
105.30
14.4
65.6
9.8
7.5
FY17E
929.50
10.0
123.50
17.2
80.0
21.9
6.2
Y/E Mar (Rs Cr)
Source: Company, Equinomics Research & Advisory Private Ltd
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Equinomics Research & Advisory Private Limited - Investment Adviser
Disclaimer
Stock Disclosure: Whether Stock Held By:
Tata Sponge Iron Ltd.
G.Chokkalingam & Family
Equinomics
NO
NO
Equinomics Research & Advisory Private Ltd - Investment Adviser (SEBI REG. NO. INA000001712)
G. Chokkalingam - Founder & Managing Director
Head Office – Mumbai . 18 - A/3, Ekta CHS, Shivdham Complex, Opposite Fire Brigade, Near Oberoi Mall, Malad (East), Mumbai - 400097
Ph: +91 22 28492942 | Email: chokka.g@equinomics.in
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Equinomics Research & Advisory Private Limited - Investment Adviser