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  • Stock Recommendation: Tata Sponge Iron Ltd – ACCUMULATE – TP Rs.1055

    Publish Date: 19th July, 2018

    Result Update

    Tata Sponge (TTSP) Q1FY19 reported numbers were in-line with estimates. Higher realisation and improvement in operating leverage led to a 56.1% YoY jump in EBITDA to Rs603 mn (down 2.2% QoQ), with an EBITDA margin of 23.1% (below estimates). TTSP's spread in sponge iron segment continued to remain strong, however, we feel the sustainability of the same for the long term is difficult.

    Key Highlights

    • Sponge iron sales volume during the quarter grew 16.8%/6.5% YoY/QoQ to 115KT (production during the quarter stood at 116KT, highest ever), the realisation was largely flat QoQ (up 31.3% YoY) to Rs21,384/tonne.
    • TTSP reported PAT of Rs456mn, in-line with estimates
    • Management expects to operate the facility at rated capacity and is targeting 425KT of volume in FY19. At the same time, management is applying for the fresh Environmental Clearance to further enhance its capacity. We are building in 420KT and 425KT of volume for FY19E and FY20E, respectively.

    Valuation & outlook

    We continue to remain positive on TTSP's strong business model, but foresee current valuation as fair, as the sustainability of spreads in the sponge iron business is difficult and expectation of deployment of surplus cash for the forward integration (Steel plant). Besides this, strengthening of Dollar index and trade war is weighing on valuation multiples across the metal sector. The stock has corrected since our last recommendation (Reduce at CMP Rs.1130), factoring this, we upgrade our stock to Accumulate, with a revised target price of Rs1,055, valuing it at 4x FY20 EBITDA (earlier 5x). We have not assigned any value to the investment of Rs1.8bn made by the company on the coal block, as the company's coal block is yet to put in the auction.

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