Asia Pacific Equity Research
03 December 2008
Tata Steel Ltd
Operating environment worsens significantly
• Strong Sept-08, covenants under control as of now: Tata Steel reported a strong Sept-08 (recurring PAT of Rs51B, +253% y/y, +21% q/q), with Corus (EBITDA +25% q/q) above our estimates. The company gave a detailed walk of the various debt covenants and highlighted that as of now they are under control. Management reiterated its focus on cash, critical capex and cost savings for the near term given the weak steel environment. • Stock trading below adjusted book value; however, operating environment for steel and Corus in particular has deteriorated sharply: We believe a sustained demand and price recovery in Europe is likely only in H2CY09E at the earliest, and this remains our base case for Tata Steel. In the event the recovery gets pushed into 2010, we see significant downside to our earnings and cash flow estimates. While India operations should remain relatively strong, we believe it is not immune to the downcycle. • Reducing capex estimates: short-term positive, longer term . . . ? Tata highlighted that focus is currently on the Jamshedpur brownfield expansion and Orissa greenfield (where spending should remain low next year). While this is a short-term positive given the stressed operating environment, we believe increasing capacity in India (low cost) and/or acquiring ready-to-mine raw material assets remains a longterm strategic necessity for Tata in order to increase margins at Corus. • Focus on cash flow more important than earnings in current environment: While Tata should benefit from working capital release, and while we also significantly cut our capex estimates for FY09-11E (30%), we expect free cash flow generation to remain low. Current net debt (excluding FCCB) stands at $10.1B. Company highlighted that Corus remains committed to de-stocking its current steel inventory. • Remain Neutral, cutting EPS and PT: We cut our EPS estimates by 16-21% over FY10E-11E and reduce our Sept-09 target price to Rs155. Key upside risks to our earnings estimates remains a V-shaped recovery in steel prices and demand. Key downside risks are non recovery in steel demand and steel prices in H2CY09E.
Tata Steel: Reuters: TISC.BO, Bloomberg: TATA IN
EBITDA ( Rs bn) Net Profit ( Pre Exceptional s bn) EPS ( Pre Exceptional Rs) Net Sales growth (%) Net profit growth (%) ROE (%) P/E (x) EV/EBITDA (x) FY08A 180 62 71 649% 42% 24% 2.1 3.3 FY09E 195 93 107 7% 51% 22% 1.4 2.9 FY10E 148 53 61 -13% -43% 11% 2.4 3.8 FY11E 157 60 69 0% 13% 11% 2.1 3.4
Neutral
TISC.BO, TATA IN Price: Rs148.65
▼ Price Target: Rs155.00
Previous: Rs290.00
India India Metals & Mining Pinakin Parekh, CFA
AC
(91-22) 6639 3018 pinakin.m.parekh@jpmchase.com
Dr.Prit Pal
(91-22) 6639 3013 prit.x.pal@jpmorgan.com J.P. Morgan India Private Limited
Price Performance
900 Rs 500 100
Dec-07 Mar-08 Jun-08 Sep-08 Dec-08
TISC.BO share price (Rs) BSE30 (rebased)
YTD ABS REL -83.6% -27.1%
1m -26.9% -17.2%
3m -73.7% -34.7%
12m -81.7% -26.8%
52-wk range (Rs) Mkt cap. (Rs MM) Mkt cap. (US$ MM) Avg. daily volume (MM) Avg daily value (US$ MM) Shares O/S (MM) Index (BSE Sensex) Exchange rate
965 - 137.5 108711 2174 9.0 48.9 869 8739 50.0
Source: Company data, Datastream, J.P. Morgan estimates. Prices as of 2 Dec, 2008 close.
See page 21 for analyst certification and important disclosures, including non-US analyst disclosures.
J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.
Pinakin Parekh, CFA (91-22) 6639 3018 pinakin.m.parekh@jpmchase.com
Asia Pacific Equity Research 03 December 2008
While the stock is trading below adjusted book value (adjusted for goodwill and pension asset gains on the balance sheet), we would wait for a meaningful recovery in the steel environment in Europe before stepping in. We remain Neutral on the stock
Stock trading below adjusted book value; however, given high leverage, we would wait for a meaningful European recovery
While Tata Steel’s stock price has declined significantly (84% from peak levels) and is now trading below its adjusted book value (adjusted for goodwill and pension asset gains on the balance sheet), we believe the operating environment -- specifically in Europe -- remains challenging over the next 6-9 months. India operations profitability, while remaining strong, should be significantly below FY09E levels (driven by lower steel and ferro chrome prices). Given the high level of financial (adjusted net debt/equity at 1.6x FY09E) and operating (relatively high level of fixed costs at Corus) leverage, we believe a sustained recovery in the steel environment is critical for Tata Steel. J.P. Morgan European steel analyst Jeffrey Largey believes a steel price recovery is likely in Europe only in H2CY09E as end user demand remains weak on the back of a deteriorating economic outlook.
Figure 1: Tata Steel stock price and CIS HRC prices
$/Mt, Rs
TATA STEEL 875 MB - Steel HR Coil CIS $/MT
While our base case scenario calls for steel environment (demand and prices) improving in H2CY09E, we believe that, in the event that the recovery is pushed out to CY10E, the downside for Tata Steel remains high given significant financial leverage
While we cut our capex outlook, and while we believe this is a short-term positive for the stock as it increases free cash flow generation, we believe longer term the two ways to reduce costs/increase margins at Corus are 1) to acquire ready-to-mine raw material assets and/or 2) to increase steel-making capacity in India, and therefore longerterm capex in India remains a strategic necessity, in our opinion
1000
625
375
84% decline in stock price from peak as CIS HRC steel prices have fallen by 58%
700
125 Nov-07 Feb-08 May-08 Aug-08 Oct-08
400
Over the next two to three quarters, we believe a key event would be any possible debt repayment or refinancing requirements for the company
Source: DataStream
We cut our earnings estimates by 21% and 11% for FY10E and 11E (while increasing our FY09E estimates by 16% to account for the stronger than expected Q2FY09), respectively, and reduce our Sept-09 target price to Rs155. We remain Neutral on the stock and believe a sustained European recovery is key to the investment thesis of Tata Steel; we also believe a recovery (not driven only by restocking but also by genuine end user demand recovery) is at least two to three quarters away. We also significantly lower our capex outlook over FY09-11E. In the event that the steel market does not recover (particularly in Europe) in H2CY09E, given Tata Steel’s high financial leverage and capex commitments towards the Jamshedpur expansion, we believe free cash flows would be under stress.
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Pinakin Parekh, CFA (91-22) 6639 3018 pinakin.m.parekh@jpmchase.com
Asia Pacific Equity Research 03 December 2008
Table 1: Major Assumptions- Tata Steel
%, Rs Mn, % Assumptions FY09E Volume Asian Entities Corus India EBITDA Asian Entities Corus India Total New Old % Change New Old % Change New Old % Change New Old % Change New Old % Change New Old % Change New Old % Change New Old % Change New Old % Change 4.1 4.1 0% 16.1 18.5 -13% 5.4 5.4 -1% 11,620 11,620 0% 74,541 74,870 0% 96,924 100,320 -3% 195,085 190,811 2% 458,021 499,868 -8% 107.30 92.47 16% FY010E 3.5 4.1 -15% 15.0 17.7 -15% 6.5 6.3 3% 4,670 7,520 -38% 51,275 71,035 -28% 84,585 92,352 -8% 147,529 174,906 -16% 453,870 485,302 -6% 61.13 77.06 -21% FY011E 3.7 4.10 -10% 15.3 18.01 -15% 6.6 6.56 0% 4,936 5,880.15 -16% 60,458 74,869.92 -19% 84,389 93,458.42 -10% 156,783 178,208.49 -12% 422,299 496,906.88 -15% 68.97 77.62 -11%
Net Debt EPS
Source: Company data, J.P. Morgan estimates.
Q2 results snapshot: Corus earnings higher than estimates
Consolidated Sept-08 results were higher than our estimates at Rs51B (+253% y/y, +21% q/q). We had built in flat earnings q/q. Consolidated EBITDA at Rs82.5B increased by 75% y/y and 18% q/q. The higher than estimated earnings were primarily driven by Corus, where sequential (q/q) EBITDA increased by 25% to $981MM, even as volumes declined by 8% q/q. As a result, $EBITDA/MT increased by 36% q/q. Price increases in the July-Sept quarter in Europe were higher than the cost increases, thus the higher-than-expected EBITDA. We believe EBITDA is a more relevant metric given the swing in tax rates at the overseas operations.
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Pinakin Parekh, CFA (91-22) 6639 3018 pinakin.m.parekh@jpmchase.com
Asia Pacific Equity Research 03 December 2008
Table 2: Quarterly P& L Statement
Rs, Rs in millions, % Net Sales Raw Materials Employee Costs Power Costs Freight and Handling Other Expenditre Total Operating costs EBITDA Interest Depreciation Other Income PBT Tax Deferred tax Recurring PAT Recurring Profit post Deferred tax Extraordinary Items/(Gains) Employee Separation Scheme Other Extraordinaries Deferred tax Reported Profit
Source: Company data, J.P. Morgan calculations..
1QFY08 311,623 137,113 40,555 11,259 14,088 60,490 263,505 48,118 8,520 10,125 1,341 30,815 12,526 18,289 45,315 63,604
2QFY08A 324,249 146,271 39,494 91,257 277,022 47,227 13,847 11,014 1,450 23,816 9,389 14,427 19,562 565 33,424
3QFY08A 318,985 144,459 41,667 16,722 76,711 279,560 39,426 10,809 10,113 2,103 20,608 7,707 12,901 1,900 652 14,149
4QFY08 360,501 159,194 45,067 38,034 29,241 43,806 315,341 45,160 8,662 10,119 848 27,227 10,871 16,356
1QFY09 435,083 201,770 49,012 16,150 17,245 81,030 365,207 69,876 8,243 11,050 527 51,110 8,930 42,181 3,034 (137)
2QFY09A 441,990 212,056 47,545 17,698 16,067 66,127 359,493 82,497 8,208 11,470 844 63,662 12,664 50,999 3,962 681 47,717
% y/y 36%
% q/q 2%
75%
18%
167% 253%
25% 21%
12,323
39,009
Table 3: Segment breakdown
$Mn, MT EBITDA Rs Mn Corus Nat Steel Singapore Tata Steel Thailand Tata Steel India Total EBITDA Volumes Mn MT Corus Nat Steel Singapore Tata Steel Thailand Tata Steel India Total Volumes $ EBITDA/MT Corus Nat Steel Singapore Tata Steel Thailand Tata Steel India Total EBITDA/MT
Source: Company reports and J.P. Morgan calculations.
Q1FY08
Q1FY09 728 50 85 653 1,516 Q1FY09 5.80 0.53 0.3 1.04 7.7 6.21 0.83 0.35 1.16 8.6 Q1FY09 117 60 243 563 177
Q2FY09 1,039 24 18 737 1,818 Q2FY09 5.69 0.77 0.25 1.24 8.0 Q2FY09 183 31 72 594 229 % q/q % q/q
% q/q 43% -52% -79% 13% 20%
Q1FY08
-8% -7% -29% 7% -7% 56% -48% -70% 6% 29%
Q1FY08 -
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Pinakin Parekh, CFA (91-22) 6639 3018 pinakin.m.parekh@jpmchase.com
Asia Pacific Equity Research 03 December 2008
Conference Call takeaways- Focus on cash and cost savings
The company highlighted that Corus faces a tough operating environment.
Key highlights of the conference call were on management’s focus on cash discipline and cost savings. The company highlighted that currently capex focus remains only on the Jamshedpur expansion and the Orissa project. With Orissa greenfield project progress remaining slow, we expect spending to remain low on this project next year. The company highlighted that it continued to work strongly on the various cost savings/synergies plans for both the India operations and the UK one. While we believe the company's cost savings should be higher than targeted, we believe it would not be enough to offset the demand price declines seen across the key geographies, particularly in Europe. The company also gave a detailed walk of the various covenants at both India and UK (details in the Leverage section of the note). While the covenants look well under control at both the entities, and therefore any immediate risk of refinancing remains low, we believe that in the event that the recovery in the steel environment does take place in H2CY09E, we see higher risk of refinancing requirements.
Corus- Visibility remains low on end demand recovery
Given the outlook of weak steel prices in Europe and higher cost of the steel inventory and Corus focused on de-stocking its inventory, we expect Corus to post weak earnings over the next 2 to 3 quarters
European steel outlook remains weak, with demand from the key consuming sectors like auto and construction remaining low. Our European steel analyst Jeffrey Largey expects demand and price outlook to remain challenging at least for the next two to three quarters. While sharp depreciation in the pound sterling to an extent mitigates the pressure from imports (similar to India) in UK, demand remains very weak in the UK. Given the outlook of weak steel prices in Europe and higher cost of the steel inventory, with Corus focused on de-stocking its inventory, we expect Corus to post weak earnings over the next 2-3 quarters. Excerpt below from our European steel analyst Jeffrey Largey’s report on Salzgitter, titled Balance sheet remains solid but earnings picture weakening, dated 18 Nov 2008. We estimate group shipments (Steel, Tubes and Trading divisions) in 2009 could fall 17% from 2008 levels as demand from key end-markets such as the automobile, construction, white-goods and machinery sectors is impacted by the global economic slowdown and SZG runs at low capacity utilization rates, which is negative for fixed costs. Given the lack of visibility towards 2009 and tight credit conditions, customers in Europe are currently in a wait-and-see mode and are only buying what they need. We believe the current de-stocking phase could persist into 2009 despite aggressive production cuts by European steel producers including SZG, which could cut steel production by up to 30% beginning in 4Q. Unfortunately for steelmakers, their production cuts are chasing a moving target (weakening demand) and difficult credit conditions. Another excerpt from our European Steel analyst Jeffrey Largey’s report on European Steel titled, Balance sheet remains solid but earnings picture weakening, dated 23 Oct 2008. Drop in steel prices likely to last several quarters Peak to trough percentage changes in European steel prices have varied over the last two decades, with the longest period of decline lasting nearly two years (from early
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Pinakin Parekh, CFA (91-22) 6639 3018 pinakin.m.parekh@jpmchase.com
Asia Pacific Equity Research 03 December 2008
1995 to early 1997) while the shortest decline has been only two months (December 2007 to January 2008). However, the more recent and short drops in steel prices have been created by micro cycles due to inventory builds or import pressure during relatively robust economic periods, which is why prices corrected but then resumed their upward trend as demand remained solid. Given the weakening outlook for the global economy, we believe the next few quarters could prove challenging for European steel prices as demand could be under pressure for some time due to the slowing global economy and the knock-on effects of the credit crisis. Our base case assumes a period of depressed steel prices that is likely to last at least six months and possibly longer, depending on global economic growth and production discipline from the industry. Another overhang for European steel prices remains inventories, which grew to elevated levels during the recent summer months and could accentuate pressure on steel prices as distributors (at least based on the last publicly available data) still hold adequate stocks. While steelmakers never denied that European steel inventories were reaching high levels on an absolute basis during the summer, it was generally disregarded as a threat since shipment levels remained high or inventories were expected to increase heading into the seasonally slow 3Q. If steel trading activity froze up in September and October, we believe inventories could remain elevated, which would likely lead to further de-stocking by steel customers, fewer purchases and lower steel prices.
Table 4: EBITDA Margin changes for Major Steel companies
% CYO8/FY09E EBITDA % change Voestalpine Salzgitter MT Thyssenkrupp Steel SSAB Evraz MMK Severstal Baosteel A ANGANG H MAANSHAAN H CHINA STEEL SAIL Tata Steel
Source: J.P. Morgan estimates
CY09/FY10E -33% -35% -52% -18% -36% -47% -41% -61% -2% -6% -2% -2% -37% -24%
CY10/FY11E 10% 16% 34% -1% 11% -2% 21% 18% 26% -2% 52% 6%
11% -9% 24% -2% 20% 92% 42% 67% -10% -6% 22% 8% -19% 8%
While Corus benefits from lower iron ore and coking coal contracts next year, we expect sales volumes to remain under pressure
Corus benefits from lower iron ore, coking coal, but volumes should remain under pressure While we build in lower iron ore and coking coal costs for FY10E (J.P. Morgan forecasts 30% decline in iron ore and coking coal contract prices next year) and this should result in working capital release for Corus, we believe demand outlook remains very weak as of now (driven by de-stocking and end user demand impacted by deteriorating economy). While Corus is currently implementing deep and extended production cuts (steel production cuts by 30% since March-09), and the depreciation of the pound sterling to an extent mitigate the impact of lower pressure from imports, we believe EBITDA at Corus should remain materially weak over the next 3-4 quarters. We cut our EBITDA estimates for Corus by 10-31% over FY0911E. Our estimates are predicated on the European steel environment improving in
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Pinakin Parekh, CFA (91-22) 6639 3018 pinakin.m.parekh@jpmchase.com
Asia Pacific Equity Research 03 December 2008
H2CY09E, though in the event the recovery does not materialize we see significant downside to our earnings estimates for Corus.
Table 5: Corus Volumes and EBITDA Table
MT, Rs Mn Corus Volumes Revenues EBITDA EBITDA %
Source: J.P. Morgan estimates, Company data.
FY09E 16 12,418 936 7.53%
FY10E 15 10,293 644 6.25%
FY11E 15 10,292 759 7.37%
India operations to remain relatively robust, but not immune to downcycle
While India operations remain relatively profitable compared to Corus, we believe it is not immune to the steel downcycle and declining end user demand, and we expect EBITDA margin contraction at India operations
While the India operations remain relatively strong compared to Corus and the other Asian entities, we believe the Indian operations are not immune to the current steel downcycle. While Tata Steel India benefits from captive iron ore and partial integration of coking coal, the India operations would face steel pricing pressure and lower demand from key user industries in the auto and construction sectors. We lower our India operations EBITDA estimates by 6-13% over FY09-11E. We believe Indian profitability remains vital to Tata Steel given the weak earnings outlook in the other divisions. However, our India operations earnings out look is predicated on a steel demand recovery in H2FY10E, and in the event that a recovery in domestic demand does not materialize, we would see downside risk to our estimates.
Table 6: Tata Steel India Volumes and Profitability
Rs in millions, MT Tata Steel India Volumes (Mn Ton) Revenues EBITDA EBITDA % Net Profit
Source: J.P. Morgan estimates, Company data.
FY 2008 4.7 196,933 82,235 42% 44,659
FY 2009E 5.4 240,255 96,924 40% 54,695
FY 2010E 6.5 253,761 84,585 33% 43,451
FY 2011E 6.6 251,348 84,389 34% 42,586
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Pinakin Parekh, CFA (91-22) 6639 3018 pinakin.m.parekh@jpmchase.com
Asia Pacific Equity Research 03 December 2008
Figure 2: Indian Operations EBITDA % vs Average CIS HRC Prices
%, $/MT
1,000 900 800 700 600 500 400 300 200 100 FY96 FY99 EBITDA % India Operations (RHS ) FY02 FY05 FY08 Av erage Yearly CIS HRC Prices ($/ MT) 22% 21% 17% 25% 17% 20% 19% 26% 33% 42% 39% 40% 40% 35% 30% 25% 20% 15% 42% 45%
Source: Bloomberg, J.P Morgan estimates
Reducing capex: Short-term positive, longer term . . . ?
While lower capex is a shortterm positive as it alleviates cash flow stress, we believe that, longer term, increasing capacity in India and/or acquiring readyto-mine raw material assets remains a strategic necessity for Tata Steel
We reduce the consolidated entity’s capex outlook by 33% over FY09-11E. Given high leverage, and lower earnings given steel cycle downturn, the company remains focused on cash flow, and we believe this will lead to capex pushback into FY11E+. While this remains a short-term positive in the sense that it alleviates cash flow stress, we believe that, longer term, increasing steel capacity in India and/or acquiring raw material assets (iron or, coking coal) remain the two sources for increasing margins at Corus, and thus capex remains a strategic necessity, in our view. The key projects that Tata Steel has on the horizon are: • 2.9MT expansion at Jamshedpur- Commissioning by FY11E • 6MT Orissa green field project We believe that spending on the greenfield Orissa project will remain low, with the company possibly focusing more on the 2.9MT brownfield expansion. While low asset prices across ready-to-mine and mining (iron ore and coking coal) companies is a positive for Tata Steel, we believe the company lacks financial flexibility to pursue acquisitions.
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Pinakin Parekh, CFA (91-22) 6639 3018 pinakin.m.parekh@jpmchase.com
Asia Pacific Equity Research 03 December 2008
Figure 3: Capex vs Adjusted Net Debt / Equity
Rs in millions
1.70 1.60 1.50 1.40 1.30 1.20 1.10 1.00 FY09E FY10E 59,999 59,681
69,681
70,000 65,000 60,000 55,000 50,000 45,000 40,000
FY11E Adj. Net debt/Equity (LHS)
Capex (RHS) Rs Mn
Source: J.P. Morgan estimates, company data.
Acquisition versus brownfield capex We believe the company remains committed to the brownfield capex at Jamshedpur and would possibly prefer it over a large mining acquisition; we believe this is primarily driven by the staggered expenditure over the expansion.
Leverage remains the key issue, working capital remains high, covenants under control as of now
We believe investors should focus on free cash flow generation given the high leverage and capex commitments
The key overhang for Tata Steel is the high degree of financial leverage. Adjusted (for goodwill removed from equity) net debt/equity at 1.6xFY09E remains uncomfortably high, in our view. While the company should benefit from working capital release in FY10E, driven by lower prices, we believe it could be negated to an extent by possibly higher inventory days. The company in its Sept-08 presentation highlighted that inventory days has increased from March-08 at 240 days to Sept-08 at 324 days. Debtor days remained more stable and increased from 114 days to 122 days in the same period. Inventory at 4.2MT levels remains high, highlighting the low demand situation.
Figure 5: Inventory days and Inventory amount (Tata Steel Consolidated)
5500 129 122 5000 4500 4000 3500
Figure 4: Debtor days and Debtors (Tata Steel Consolidated)
days, $ in millions
135 130 125 120 115 110 105 Mar-08 Jun-08 Debtors in US$ Mn Sep-08 Day s In sales (LHS ) 114
days, $ in millions
340 320 300 280 260 240 220 200 Mar-08 Jun-08 Inv entory $mn Inv entory Day s Sep-08 240 250 7000 324 6500 6000 5500 5000 4500
Source: Company reports and J.P. Morgan estimates.
Source: Company reports and J.P. Morgan estimates.
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Pinakin Parekh, CFA (91-22) 6639 3018 pinakin.m.parekh@jpmchase.com
Asia Pacific Equity Research 03 December 2008
Overall, even though we build in lower capex, we do not expect the company to generate meaningful free cash flows to pay down debt. In the event that the expected steel price recovery in H2CY09E does not materialize, we see downside risk to our free cash estimates.
Table 7: Free Cash Flow table
Rs in millions FY08 Net Income (Pre Exceptional) Add: Depreciation Working Capital Movement Operational Cash Flow Capex Free Cash Flow
Source: J.P. Morgan estimates, Company data.
FY09E 93,295 42,070 (62,897) 72,468 (59,999) 12,468
FY010E 53,152 40,861 (20,833) 73,181 (59,681) 13,500
FY011E 59,967 41,901 10,302 112,171 (69,681) 42,490
61,973 41,370 (108,583) (5,240) (318,795) (324,035)
The company gave a detailed breakdown of the various covenants at the Tata Steel India and Tata Steel UK level. While the covenants are well under control at both the entities and therefore any immediate risk of refinancing remains low, we believe in the event that the recovery in the steel environment does take place in H2CY09E, there would be a higher risk of refinancing requirements.
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Pinakin Parekh, CFA (91-22) 6639 3018 pinakin.m.parekh@jpmchase.com
Asia Pacific Equity Research 03 December 2008
Figure 6: Net Debt/EBITDA Tata Steel UK
x
4.5 4 3.5 3 2.5 2 Mar-08
Source: Company reports.
Figure 7: Cash flow/ Net debt Service Tata Steel UK
x
Covenant
Tata Steel UK position 4.25 3.3 3 4.25
4.25
2 1.75 1.5
Tata Steel UK position 1.7 1.7
Covenant 1.6
2.7
1.25 1 1 1 1
Jun-08
Sep-08
0.75 Mar-08
Source: Company reports.
Jun-08
Sep-08
Figure 8: Debt/EBITDA, Tata Steel India
x
4.5 4 3.5 3 2.5 2 Mar-08
Source: Company reports.
Figure 9: Net Income/Peak Debt Service, Tata Steel India
x
Covenant
Tata Steel India position 3.99 3.99
Tata Steel India position
3.99
Covenant 1.8 1.64
1.48
2.23 2.25 2.18 Sep-08
1.3
1.3
1.3
Jun-08
1 Mar-08
Source: Company reports.
Jun-08
Sep-08
Pensions- Fund remains in surplus as of now
Corus has large pension obligations and, as per the FY08 annual report, pension assets stood at of Rs1,176B and pension liabilities of Rs1,063B, resulting in a pension surplus of Rs112B (recognized as an asset on the balance sheet). The pension asset breakdown as per the FY08 Annual report is equities 25%, bonds 62%, property 7%, and other assets 6%. Continued deterioration of capital markets with a potential reduction in discount rates for the pension liabilities could result in a possible deficit in the pension plan (the deficit would have to be recognized as a debt on the balance sheet). The company in its Sept-08 results presentation highlighted that the surplus as of now at the pension plan stood at $819MM at Sept-08, down from $1334MM at March-08 end.
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Pinakin Parekh, CFA (91-22) 6639 3018 pinakin.m.parekh@jpmchase.com
Asia Pacific Equity Research 03 December 2008
Figure 10: Pension Surplus
$ in millions
1600 1400 1200 1000 800 600 400 200 0 Mar-07 Mar-08 Jun-08 Sep-08 371 692 819 Combined Surplus of pension funds($Mn) 1334
Source: Company reports and J.P. Morgan estimates.
Table 8: Pension Plan Funding and Investment Details
Pension Plan as of March-08 Fair value of plan assets Benefit obligations Benefit obligation (over)/under plan assets Investment details as of March-08 Equities Bonds Property Cash
Source: Company reports and J.P. Morgan estimates.
FY08 1,176,196 1,063,309 112,887 25% 69% 5% 2%
Steel industry- Variables to watch out for
We believe that the credit/liquidity crunch, combined with severe de-stocking have been the key reason behind the sharp fall in steel prices. We believe while end user demand is expected to remain weak over the next 12 months, the key to steel prices and earnings for next year would be how the following variables move: • Continued global steel industry and supply discipline: We have so far seen a far more proactive global steel industry in the face of severe price and demand declines. Steel companies across India, Europe, and CIS, US have announced large production cuts. We believe continued industry discipline would potentially mean a higher floor in terms of industry profitability into FY10E (via lower raw material prices and some recovery in steel prices induced by sharp production cuts). However, we believe the key to industry supply discipline is lower Chinese steel exports. • Re-stocking driven by easing credit conditions: Any steel price recovery initially in our view would possibly be driven initially by re-stocking. However, steel trade has been severely impacted by the credit crisis and therefore increased credit availability in our view is critical for re-stocking to begin.
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Pinakin Parekh, CFA (91-22) 6639 3018 pinakin.m.parekh@jpmchase.com
Asia Pacific Equity Research 03 December 2008
Table 9: Steel Production Cuts (Excerpt J. P Morgan Global Metals report titled- Iron Ore and Coal Worst Case Becoming Base Case, dated 19 November 2008)
Mtpy Region/ Country World North America Latin America EU- 27 Company Arcelor Mittal AK Steel Severstal Ternium Severstal TK Steel Corus Salzgitter Riva Severstal NLMK MMK Angang Steel Maanshan Hebei Baosteel Ispat Cap Shutdowns (Mtpy) 36.0 2.8 3.5 % of Capacity 35% 35% 30% 35% 30% 20-30% 20% 30% 12% 25% 14% 15% 20% 20% 10-20% 15%
CIS China
2.4 1.0
Other Asia
Source: J.P. Morgan estimates, company data.
Figure 11: Global and China y/y change in steel production
%
45% 35% 25% 15% 5% -5% -15% -25% Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Global
Source: IISI
Jan-06 China
Jan-07
Jan-08
• Chinese steel exports: Chinese steel exports have declined sharply in Oct-08 (down 36% m/m), but our Chinese steel analyst Feng Zhang believes this is more due to lack of demand in the overseas market and buyers and expect steel exports to remain elevated post the removal of export tariffs. We believe continued high Chinese steel exports can potentially nullify the supply discipline in other regions and lead to lower steel prices • Bulk contracts for next year: Our global metals have reduced their forecast for iron ore and coking coal, and we now expect approximately 30% decline in both for next year. While the bulk contracts would only start flowing in from April onwards (for SAIL coking coal contracts are from July-June), it should be positive for profitability in H2FY10E.
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Pinakin Parekh, CFA (91-22) 6639 3018 pinakin.m.parekh@jpmchase.com
Asia Pacific Equity Research 03 December 2008
Table 10: J.P. Morgan Iron Ore Price Forecasts
$c/dmtu 2007 Southern System Fines to Europe New OLD % Change Carajas Fines To Europe New OLD % Change Vale's Lumps to Europe New OLD % Change Hamersley Fines to Asia New OLD % Change Hamersley Lumps to Asia New OLD % Change
Source: J.P. Morgan estimates, company data.
2008 134 134 0% 141 141 0% 197 197 0% 145 145 0% 202 202 0%
FY2009E 94 121 -22% 98 127 -23% 138 178 -22% 101 130 -22% 141 182 -23%
FY2010E 85 109 -22% 89 114 -22% 124 160 -23% 91 117 -22% 127 163 -22%
FY2011E 76 98 -22% 80 102 -22% 112 144 -22% 82 105 -22% 114 147 -22%
FY2012E 69 83 -17% 72 87 -17% 101 122 -17% 74 90 -18% 103 125 -18%
FY2013E 62 75 -17% 65 78 -17% 91 110 -17% 66 81 -19% 93 112 -17%
LT Real 65 65 0% 68 68 0% 77 77 0% 65 65 0% 78 78 0%
81 81 0% 85 85 0% 100 100 0% 80 80 0% 103 103 0%
Table 11: J.P. Morgan Coking Coal Price Forecast
$ 2007 Thermal coal New Old % Change Semi Soft Coking New Old % Change Hard Coking Coal New Old % Change
Source: J.P. Morgan estimates, company data.
2008 125 125 0% 250 250 0% 300 300 0%
FY2009E 100 125 -20% 120 150 -20% 200 260 -23%
FY2010E 100 115 -13% 120 138 -13% 175 250 -30%
FY2011E 90 100 -10% 108 120 -10% 150 175 -14%
Long Term 70 70 0% 80 80 0% 100 100 0%
55.7 55.7 0% 62 62 0% 98.4 98.4 0%
• China stimulus package and recovery: Our Chinese steel analyst believes that the stimulus package announced by the Chinese government is positive and should aid steel demand recovery in H2CY09E.
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Pinakin Parekh, CFA (91-22) 6639 3018 pinakin.m.parekh@jpmchase.com
Asia Pacific Equity Research 03 December 2008
Table 12: China Demand Supply Model
%, Rmb, Million Tonnes Crude Capacity FY02 FY03 FY04 FY05 FY06 FY07 FY08E FY09E FY10E 230 286 356 432 488 545 585 615 645 Change 24% 24% 21% 13% 12% 7% 5% 5% Crude Prod 180 219 269 348 422 496 520 550 600 Change 22% 23% 29% 21% 18% 5% 6% 9% Utilization rate 78% 77% 76% 81% 86% 91% 89% 89% 93% Net Import 24 36 13 0 -34 -54 -43 -38 -35 Apparent Consumption 204 255 282 348 388 442 477 512 565 Change 25% 11% 23% 11% 14% 8% 7% 10% HRC Price Rmb $/t 2,710 3,327 4,517 4,198 3,951 4,298 4,950 4,500 4,600 Change 23% 36% -7% -6% 9% 15% -9% 2%
Source: J.P. Morgan estimates, company data.
Reducing estimates and target price- Maintain Neutral
We reduce our earnings estimates sharply to account for the steel downcycle, lower volumes and lower profitability. We reduce our consolidated EPS estimates by 21% and 11% for FY10E and 11E, respectively. We increase our FY09E EPS estimates by 16% mainly on account of lower tax rate and lower interest expense. While we continue to value Tata Steel using Sum of the parts, we reduce our valuation multiples for the different units. Key upside risks to our earnings estimates and Sept-09 target price of Rs 155 remains a V-shaped recovery in steel prices and demand. Key downside risks are a) non recovery in steel demand and steel prices in H2FY10E; and b) sharply lower earnings over the next 2- 3 quarters, possibly triggering debt repayment, refinancing covenants in the debt schedule.
Table 13: Tata Steel Valuation table
Rs, Rs in billions Corus India Asia Total EV Net Debt Derived Equity Value No of Shares (Mn) Target Price
Source: J.P. Morgan estimates,, company data.
FY10 EBITDA (Rs B) 51 85 5
Multiple 4 4.3 4
EV 205 364 19 587 454 134 869.5 155
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Asia Pacific Equity Research 03 December 2008
Figure 12: Tata Steel EV EBITDA Band Chart
x
1000 900 800 700 600 500 400 300 200 100 0
Jan-93 Nov-95 Sep-98 Price (Rs)
Source: J.P. Morgan estimates, company data.
6x
5x
4x
3x
Jul-01 3x 4x May-04 5x 6x Mar-07
Figure 13: TATA Steel P/B Band chart
x
1000
800
3x
600
2x
400
1x 0.5x
200
0
Jan-93 Aug-94 Apr-96 Dec-97 Jul-99 Mar-01 Nov-02 Jul-04 Feb-06 Oct-07
Price
Source: J.P. Morgan estimates, company data.
0.5x
1x
2x
3x
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Pinakin Parekh, CFA (91-22) 6639 3018 pinakin.m.parekh@jpmchase.com
Asia Pacific Equity Research 03 December 2008
Table 14: Global Steel Prices, % change – weekly, monthly and annually
Steel Prices Slabs Hot Rolled Coil Cold Rolled Coil Heavy Plates Billets Rebars Steel Prices % Change WoW Slabs Hot Rolled Coil Cold Rolled Coil Heavy Plates Billets Rebars Steel Prices % Change MoM Slabs Hot Rolled Coil Cold Rolled Coil Heavy Plates Billets Rebars Steel Prices % Change YoY Slabs Hot Rolled Coil Cold Rolled Coil Heavy Plates Billets Rebars Steel Prices % Change YTD Slabs Hot Rolled Coil Cold Rolled Coil Heavy Plates Billets Rebars CIS($/MT) 500 500 1,220 650 370 440 CIS($/MT) 0.0% 0.0% 0.0% -31.6% 15.6% 4.8% CIS($/MT) -43.2% -33.3% 0.0% -31.6% -7.5% -15.4% CIS($/MT) -9.1% -18.0% 90.6% -7.1% -28.8% -15.4% CIS($/MT) -7.8% -15.3% 83.5% -3.0% -26.0% -19.3% Europe(Euro/ MT) NA 690 750 NA NA 450 Europe(Euro/ MT) 0.0% 0.0% 9.8% Europe(Euro/ MT) 0.0% 0.0% 4.7% Europe(Euro/ MT) 35.3% 31.6% 5.9% Europe(Euro/ MT) 40.8% 35.1% -6.7% N America ($/MT) NA 858 968 1,386 NA 748 N America ($/MT) 0.0% 0.0% 0.0% -6.8% N America ($/MT) -11.4% -12.0% -4.5% -15.0% N America ($/MT) 50.0% 39.7% 46.5% 28.3% N America ($/MT) 53.2% 51.3% 63.1% NA China (Rmb/MT) NA 3,230 4,100 3,650 NA 3,750 China (Rmb/MT) 5.9% 2.5% 0.0% 2.7% China (Rmb/MT) -5.0% -10.9% -8.8% 0.0% China (Rmb/MT) -30.1% -19.6% NA -18.5% China (Rmb/MT) -35.1% -29.1% -28.4% -12.6% China Export ($/MT) NA 480 NA 600 610 650 China Export ($/MT) -12.7% -1.6% -6.2% 0.8% China Export ($/MT) -23.8% -27.7% -29.1% -4.4% China Export ($/MT) -17.2% NA 17.3% NA China Export ($/MT) -29.9% NA -11.8% NA NA Turkey Export ($/MT) NA 950 1,050 NA 360 470 Turkey Export ($/MT) NA 0.0% 0.0% NA 16.1% 0.0% Turkey Export ($/MT) NA 0.0% 0.0% NA -25.0% -24.2% Turkey Export ($/MT) NA 46.2% 47.9% NA -30.1% -16.8% Turkey Export ($/MT) NA 46.2% 47.9% NA -44.6% -35.2% GCC Import ($/MT) NA 500 950 NA 400 500 GCC Import ($/MT) NA 0.0% 0.0% NA 14.3% 22.0% GCC Import ($/MT) NA -35.1% 0.0% NA -38.5% -37.5% GCC Import ($/MT) NA NA NA NA -27.3% -15.3% GCC Import ($/MT) NA NA NA NA NA NA
Source: Bloomberg, J.P. Morgan estimates, Metal Bulletin.
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Pinakin Parekh, CFA (91-22) 6639 3018 pinakin.m.parekh@jpmchase.com
Asia Pacific Equity Research 03 December 2008
Table 15: Valuations for Ferrous and Non Ferrous Companies across Asia
Local Currency, x Company Steel India JSW Steel SAIL Tata Steel Asia ex. India Maanshaan Angang Baosteel China Steel Europe Thyssenkrup Voestalpine Americas Arcelor Mittal US Steel Nucor CSN Usiminas Russia Evraz Novolipetsk MMK Severstal Non Ferrous Hindalco Nalco Sterlite Chalco Sesa Goa Coal Shenua Banpu Ticker JSTL IN SAIL IN TATA IN 323 HK 347 HK 600019 CH 2002 TT TKA GR VOE AV MT US X US NUE US CSNA3 BS USNZY US EVR LI NLMK LI MAGN RU SVST LI HNDL IN NACL IN STLT IN 2600 HK SESA IN 1088 HK BANPU TB Rating NR OW N N OW OW UW N OW OW OW OW N OW OW OW N UW N N NR N NR N OW Market Price 181 64 148 2 7 5 22 15 14 20 26 31 24 23 7.21 8 0 3 51 170 239 4 73 14 181 Market Cap (US $ Mn) 673 5246 2226 3134 7261 12722 7932 9568 2965 28745 2981 9720 8317 4775 2650 4801 1956 2781 1736 2171 3358 12211 1134 47904 1376 P/E FY09/CY08E 2.4 6.4 1.4 8.0 7.9 8.7 5.3 3.2 2.2 2.2 1.3 4.5 4.6 3.1 1.2 1.3 1.5 4.5 4.0 6.6 4.5 36.3 3.1 9.2 5.4 FY10/CY09E 1.8 7.1 2.4 10.7 10.5 10.9 5.7 3.9 3.1 5.0 2.7 6.7 3.2 2.4 1.2 1.2 1.4 5.7 5.4 8.1 5.1 34.6 3.7 7.4 3.4 EV/EBITDA FY09/CY08E FY10/CY09E 4.2 1.4 2.9 4.0 4.8 4.4 3.8 2.1 2.5 2.2 1.4 2.6 3.1 2.2 1.8 2.0 2.3 6.5 3.8 2.8 1.5 8.5 1.3 5.3 2.5 3.7 2.7 3.8 3.9 5.1 4.6 3.8 2.0 2.8 4.1 1.9 2.9 2.0 2.1 1.5 1.7 2.4 6.7 3.9 3.6 1.8 8.0 1.8 4.1 1.6
Source: Company reports and J.P. Morgan estimates. Note: Bloomberg. Consensus estimates used for NR stocks, based on Dec 2 closing prices.
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Asia Pacific Equity Research 03 December 2008
All Data As Of
02-Dec-08
Q-Snapshot: Tata Steel Ltd.
Quant Return Drivers (a Score >50% indicates company ranks 'above average') vs Country Score 0% (worst) to 100% (best) vs Industry Value 94% P/E Vs Market (12mth fwd EPS) 93% 85% P/E Vs Sector (12mth fwd EPS) 87% 1% EPS Growth (forecast) 9% 63% Value Score 79% Price Momentum 12% 12 Month Price Momentum 10% 88% 1 Month Price Reversion 93% 22% Momentum Score 25% Quality 76% Return On Equity (forecast) 85% 13% Earnings Risk (Variation in Consensus) 34% 32% Quality Score 76% Earnings & Sentiment 10% Earnings Momentum 3mth (risk adjusted) 27% 1% 1 Mth Change in Avg Recom. 8% 56% Net Revisions FY2 EPS 66% 1% Earnings & Sentiment Score 22% 7% COMPOSITE Q-SCORE* (0% To 100%) 46% Targets & Recommendations**
Consensus Changes (4wks) Consensus Changes (4wks)
J.P. Morgan Composite Q-Score Raw Value 0.4x 0.6x -33.7% C O U N T R Y 100% 75% 50% 25% 0% 0% 29.6% 0.19 100% -150.5 -0.18 -50% 75% 50% 25% 0%
VALUE PRICE QUALITY EARNINGS
HIGH/STRONGER
-80.9% -26.9%
LOW/WEAKER 25%
50%
75%
100%
INDUSTRY Quant Return Drivers Summary (vs Country)
EPS Revisions** 7 6 5 4 3 2 1 0 Up Dn Unchanged 0.0 -10.0
(%)
EPS Momentum (%)
(Local Currency %)
Historical Total Return (%) 0 -20 -40 -60 -80 -100 1Mth -74 3Mth -81 1Yr 3Yr -27 -47
20 15 10 5 0
Targets
Recoms
-20.0 -30.0 -40.0 -50.0 -1 Mth -3 Mth
Up
Dn
Unchanged
Consensus Growth Outlook (%) 60.0 40.0 20.0 0.0 -20.0 -40.0 -60.0 -40.1
EPS Actual To FY1
FY1
FY2
46.7 11.8
FY1
FY2
3.3 -5.2
-27.3
EPS FY1 To FY2 EPS FY2 To FY3 Cash Flow FY1 To FY2 Dividends FY1 To FY2 Sales FY1ToFY2
Closest in Country by Size (Consensus. ADV = average daily value traded in US$m over the last 3 mths) Name Code Industry Reliance Infrastructure Ltd. Electric Utilities 500390-IN Kotak Mahindra Bank Ltd. Financial Conglomerates 500247-IN Tata Communications Ltd. Major Telecommunications 500483-IN National Aluminium Co. Ltd. Aluminum 532234-IN Jindal Steel & Power Ltd. Steel 532286-IN Steel Tata Steel Ltd. 500470-IN Reliance Capital Ltd. Finance/Rental/Leasing 500111-IN Mundra Port & Special Economic Zone Ltd. Other Transportation 532921-IN Pharmaceuticals: Other GlaxoSmithKline Pharmaceuticals Ltd. 500660-IN Electric Utilities GMR Infrastructure Ltd. 532754-IN Regional Banks Bank of Baroda 532134-IN
USD MCAP 2,344 2,337 2,269 2,254 2,230 2,228 2,223 2,084 1,996 1,959 1,898
ADV 22.38 7.38 0.75 1.05 4.55 17.40 49.84 3.14 0.18 3.24 2.34
PE FY1 9.6 13.7 32.7 7.0 4.4 1.5 11.3 20.3 21.4 36.3 5.7
Q-Score* 41% 5% 38% 21% 96% 7% 7% 22% 90% 1% 67%
Source: Factset, Thomson and J.P. Morgan Quantitative Research. For an explanation of the Q-Snapshot, please visit http://jpmorgan.hk.acrobat.com/qsnapshot/ Q-Snapshots are a product of J.P. Morgan’s Global Quantitative Analysis team and provide quantitative metrics summarized in an overall company 'Q-Score.' Q-Snapshots are based on consensus data and should not be considered as having a direct relationship with the J.P. Morgan analysts’ recommendation. * The Composite Q-Score is calculated by weighting and combining the 10 Quant return drivers shown. The higher the Q-Score the higher the one month expected return. On a 14 Year back-test the stocks with the highest Q-Scores have been shown (on average) to significantly outperform those stocks with the lowest Q-Scores in this universe. ** The number of up, down and unchanged target prices, recommendations or EPS forecasts that make up consensus.
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Asia Pacific Equity Research 03 December 2008
Tata Steel: Summary of Financials
Rs in billions, Rs , % Profit and Loss statement Rs in billions, year-end Mar Revenues % change Y/Y EBITDA % change Y/Y EBITDA Margin (%) EBIT % change Y/Y EBIT Margin (%) Net Interest Earnings before tax % change Y/Y Tax as % of EBT Net Income (Pre Exceptional) % change Y/Y Shares Outstanding (Diluted) EPS (pre exceptional) % change Y/Y Balance sheet Rs in billions, year-end Mar Inventories Debtors Cash and bank balances Loans and deposits Net PPE Other Assets Total assets Liabilities Sundry Creditors Others Total current liabilities Total debt Other liabilities Total liabilities Shareholders' equity BVPS
Source: J.P. Morgan estimates, company data.
FY08A 1,315 649% 180 158% 14% 139 115.2% 11% -36 102 60% 40 40% 62 42% 869 71 -5% FY08A 231 187 42 155 420 214 1,249 257 72 329 500 44 1,249 376 433
FY09E 1,401 7% 195 8% 14% 153 10.4% 11% -33 120 17% 27 22% 93 51% 869 107 50% FY09E 280 182 50 43 438 327 1,320 268 42 310 508 44 1,320 458 526
FY10E 1,213 -13% 148 -24% 12% 107 -30.3% 9% -35 72 -40% 19 26% 53 -43% 869 61 -43% FY10E 272 152 38 43 456 327 1,289 212 40 252 492 44 1,289 502 577
FY11E 1,211 0% 157 6% 13% 115 7.7% 9% -35 80 11% 20 25% 60 13% 869 69 13% FY11E 261 152 70 43 484 327 1,337 209 41 250 492 44 1,337 551 633
Cash flow statement Rs in billions, year-end Mar Net Income (Pre Exceptional) Add: Depreciation Working Capital Movement Operational Cash Flow Net Capex Free cash flow Equity raised/ (repaid) Debt raised/ (repaid) Other Dividends paid Beginning cash Ending cash DPS Ratio Analysis %, year-end Mar EBITDA margin Operating margin Net profit margin Sales growth Net profit growth EPS growth Interest coverage (x) Net debt to total capital Net debt to equity Sales/assets Assets/equity (x) ROE ROCE
FY08A 62 41 (109) (5) (319) (324) 122 251 (116) (14) 77 42 17.1 FY08A 14% 11% 5% 649% 42% -5% 5.0 37% 122% 105% 3.3 24% 14%
FY09E 93 42 (63) 72 (60) 12 0 8 (13) (10) 42 50 13.0 FY09E 14% 11% 7% 7% 51% 50% 5.9 35% 100% 106% 2.9 22% 11%
FY10E 53 41 (21) 73 (60) 13 0 (16) (9) (8) 50 38 10.0 FY10E 12% 9% 4% -13% -43% -43% 4.2 35% 90% 94% 2.6 11% 7%
FY11E 60 42 10 112 (70) 42 0 0 (11) (9) 38 70 12.0 FY11E 13% 9% 5% 0% 13% 13% 4.5 32% 77% 91% 2.4 11% 7%
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Asia Pacific Equity Research 03 December 2008
Analyst Certification: The research analyst(s) denoted by an “AC” on the cover of this report certifies (or, where multiple research analysts are primarily responsible for this report, the research analyst denoted by an “AC” on the cover or within the document individually certifies, with respect to each security or issuer that the research analyst covers in this research) that: (1) all of the views expressed in this report accurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part of any of the research analyst’s compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report.
Important Disclosures
• • Client of the Firm: Tata Steel Ltd is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company non-investment banking securities-related service and non-securities-related services. Non-Investment Banking Compensation: JPMSI has received compensation in the past 12 months for products or services other than investment banking from Tata Steel Ltd.
Tata Steel Ltd (TISC.BO) Price Chart Date
N Rs690
1,524 1,270 1,016 Price(Rs) 762 508 254 0 Dec 05 Mar 06 Jun 06 Sep 06 Dec 06 Mar 07 Jun 07 Sep 07 Dec 07 Mar 08 Jun 08 N Rs740
Rating Share Price Price Target (Rs) (Rs)
N N N N 653.84 886.35 644.80 571.80 269.75 740.00 800.00 740.00 690.00 290.00
21-Sep-07
N Rs740 N Rs800 N Rs290
15-May-08 N 11-Aug-08 29-Aug-08 17-Oct-08
Sep 08
Dec 08
Source: Reuters and J.P. Morgan; price data adjusted for stock splits and dividends. Initiated coverage Sep 21, 2007. This chart shows J.P. Morgan's continuing coverage of this stock; the current analyst may or may not have covered it over the entire period. J.P. Morgan ratings: OW = Overweight, N = Neutral, UW = Underweight.
Explanation of Equity Research Ratings and Analyst(s) Coverage Universe: J.P. Morgan uses the following rating system: Overweight [Over the next six to twelve months, we expect this stock will outperform the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Neutral [Over the next six to twelve months, we expect this stock will perform in line with the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Underweight [Over the next six to twelve months, we expect this stock will underperform the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] The analyst or analyst’s team’s coverage universe is the sector and/or country shown on the cover of each publication. See below for the specific stocks in the certifying analyst(s) coverage universe.
Coverage Universe: Pinakin Parekh, CFA: ACC Limited (ACC.BO), Ambuja Cements Limited (ABUJ.BO), Binani Cement Ltd (BINC.BO), Cipla Limited (CIPL.BO), Dr Reddy's Limited (REDY.BO), Glenmark Pharmaceuticals Ltd (GLEN.BO), Grasim Industries Ltd (GRAS.BO), Hindalco Industries (HALC.BO), Jindal SAW (JIND.BO), Maharashtra Seamless (MHSM.NS), Monnet Ispat & Energy Limited (MNET.BO), National Aluminium Co Ltd (NALU.BO), Ranbaxy Laboratories Ltd (RANB.BO), Steel Authority of India Ltd (SAIL.BO), Sun Pharmaceutical (SUN.BO), Tata Steel Ltd (TISC.BO), UltraTech Cement Ltd (ULTC.BO), Welspun Gujarat (WGSR.BO)
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Asia Pacific Equity Research 03 December 2008
J.P. Morgan Equity Research Ratings Distribution, as of September 30, 2008 Overweight (buy) 42% 53% 40% 76% Neutral (hold) 44% 51% 48% 70% Underweight (sell) 15% 43% 12% 59%
JPM Global Equity Research Coverage IB clients* JPMSI Equity Research Coverage IB clients*
*Percentage of investment banking clients in each rating category. For purposes only of NASD/NYSE ratings distribution rules, our Overweight rating falls into a buy rating category; our Neutral rating falls into a hold rating category; and our Underweight rating falls into a sell rating category.
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Asia Pacific Equity Research 03 December 2008
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