1
Apr 30, 2018
Tata Sponge Iron Ltd
Materials - Iron & Steel
Tata Sponge Iron Ltd
India Research - Stock Broking
BUY
Bloomberg Code: TTSP IN
Recommendation (Rs.)
CMP (as on Apr 27, 2018) 1071
Target Price 1318
Previous Target Price 1312
Upside (%) 23
Stock Information
Mkt Cap (Rs.mn/US$ mn) 16489 / 247
52-wk High/Low (Rs.) 1249 / 768
3M Avg. daily value (Rs. mn)
314.7
Beta (x) 1.2
Sensex/Nifty 34970 / 10692
O/S Shares(mn) 15.4
Face Value (Rs.) 10.0
Shareholding Pattern (%)
Promoters 54.5
FIIs 8.7
DIIs 0.9
Others 36.0
Stock Performance (%)
1M 3M 6M 12M
Absolute 13 (8) 14 29
Relative to Sensex 7 (5) 8 10
Source: Bloomberg
Relative Performance*
Source: Bloomberg; *Index 100
Analyst Contact
Kiran Shankar Prasad
040 - 3321 6277
kiran.prasad@karvy.com
For private circulation only. For important information about Karvy’s rating system and other disclosures
refer to the end of this material. Karvy Stock Broking Research is available on Thomson Reuters &
Bloomberg (Code: KRVY<GO>)
Exhibit 1: Valuation Summary
YE Mar (Rs. Mn) FY16 FY17 FY18 FY19E FY20E
Net Sales 5735 5573 8002 8466 8805
EBITDA 240 616 1827 1986 2124
EBITDA Margin (%) 4.2 11.1 22.8 23.5 24.1
Net Prot 319 588 1409 1561 1689
EPS (Rs.) 20.7 38.2 91.5 101.4 109.7
RoE (%) 3.9 7.0 15.2 14.9 14.4
PE (x) 22.6 18.3 10.1 10.6 9.8
Source: Company, Karvy Research; *Represents multiples for FY16 - FY18 are based on historic market price
Continuance of Superior Earning Performance............
Higher Realization Pivotal to Overall Growth: Higher realization and
expectation that the same to remain high, pick up in manufacturing and push
provided to infrastructure, would continue to drive revenue for Tata Sponge Iron
Limited in next couple of years. The management has given positive guidance
for next scal year and has set sponge iron production target of 425000 MT by
FY19E. We believe that top line of the company would grow at CAGR of 4.9% over
FY18-20E. We also believe that margin for FY19E and FY20E to stay in the range
of 23-24% amidst increasing volume and cutting down on costs. We hold “BUY”
outlook on the stock with TP of Rs. 1318 which represents 23% upside.
Highlights of Q4FY18 and full year FY18: The company has posted a good
set of numbers for Q4FY18 and full year FY18. The company in Q4FY18 recorded
top line growth of 45.7% and bottom-line growth of 120.2% over the same quarter
period of FY17. In Q4FY18 EBITDA margin improved by 987 bps, whereas EPS
grew by 120% over a similar quarter of FY17 on YoY basis. During the period,
sponge iron revenue grew by 33.2% and power revenue grew by 10.2% over the
corresponding quarter of FY17 on YoY basis.
The company for full year FY18 registered top-line growth of 32.8% and bottom-
line growth of 139.7% on YoY basis. In FY18 EBITDA margin improved by 1177
bps, whereas EPS grew by 139.7% as against FY17 on YoY basis. During the
period, sponge iron revenue grew by 34.7% and power revenue grew by 12.0% on
YoY basis. For full year FY18, net realization stood at Rs. 18387 which went up to
Rs. 21000 in Q4FY18 on QoQ basis.
Valuation and Risks
The company has witnessed a good quarterly and yearly performances. We expect
continuance of strong performance in the next couple of years as well on the back
of improved domestic and global manufacturing outlook. However, there seems
no progress on setting up of steel plant of 1.5 Mn capacities which may delay
the process of forward integration. At the current price of Rs. 1071, the stock is
valued at 1 Yr forward EV/EBITDA 4.7x of FY20E EBITDA. We value the stock at
1 Yr forward EV/EBITDA 6.5x of NSE Metal industry valuation and arrive at upwardly
revised target price of Rs. 1318 reecting 23% upside. Risks to our rating could be
increasing coke coal price, logistics cost and delay in approval for capacity addition.
80
105
130
155
180
Apr-17
May
-
17
Jun-17
Jul-17
Aug -17
Sep-17
Oct-17
Nov-17
Dec-17
Jan-18
Feb-18
Mar -18
Apr-18
KSB Pumps Ltd
Sensex
Company Update
Earnings Revision (%)
YE Mar FY19E FY20E
Sales (%) 8.5 9.4
EBITDA (%) 67.5 79.1
PAT (%) 44.4 49.0
Source: Karvy Research
L
L
L
L
L
L
2
Apr 30, 2018
Tata Sponge Iron Ltd
Operational Efficiency to Further Improve Margin: There has been an increase
in raw material costs – both iron ore and coke coal. But the cost of Iron Ore is believed
to have settled down at the current level around Rs. 2900/MT following initial problems
faced because of Supreme Court’s order of recovery of penalty from miners. The main
concern is with regard to coal price which has been volatile. Further, to meet growing
demand for quality iron ore and coal, the company has started taking part in auction
bidding process. Successful bidding will ensure backward integration and greater
control over its raw material prices.
Capacity Expansion Plan: In FY18, capacity utilization stood at 107%. In FY19,
the company aims at producing 425000 MT of Sponge Iron. The management has
given to understand that it would approach the ministry for another 35000-40000MT
for capacity additions to meet rising demand for sponge iron. In the meantime,
technological innovations are going on. The company plans to spend more on R&D.
Industry Outlook: Steel industry across the world has received great setback with
US President Donald Trump imposing a tari of 25% on steel imported into the country
from all nations except Canada, Mexico and Australia. The move has ignited a trade
war.
India is a minor player in steel export to the USA. Yet, the union government has started
working out an action plan on how to deal with the situation. The Indian government is
expected to send its representation seeking exemption from additional tari imposed
on import of steel from India. If Mr. Donald Trump accepts the demand, it will further
brighten the prospect of Indian Steel Industry.
Key takeaways from quarterly earnings
The company procures 100% Iron Ore from its parent company Tata Steel.
About of 100% of coal requirement is met through import from South Africa.
The capacity utilization of the company for sponge iron production stood at 107%
while industry capacity utilization stood around 60% in FY18.
The next year sponge iron production target has been set at 425000 MT.
Iron Ore cost in Q4FY18 was at Rs. 2900/MT.
Coal landed cost in Q4FY18 Rs. 8900/MT.
The spot price of sponge iron was at Rs. 20000/MT.
In FY18, the company produced 417000 MT and sold 414000 MT of sponge iron.
100% dependency on
coal import exposes the
company to currency risk
apart from availability risk.
Closed Iron Ore mines
becoming operational
following settling down of
Court order issues and
up-coming new Iron Ore
mines would depress the
price which will lead to
further improvement in the
margin of the company.
While operational
performance appears to be
commendable, high Other
Income is a worrying part
which might not sustain in
the long run.
Exhibit 2: Q4FY18
YE Mar (Rs. Mn) Q4FY18 Q3FY18 QoQ % Q4FY17 YoY %
Turnover 2435 2145 13.5 1672 45.7
Expenditure 1819 1664 9.3 1414 28.7
EBITDA 616 481 28.0 258 138.8
Depreciation 30 31 (3.9) 32 (7.8)
Interest 3 23 (85.8) 5 (28.3)
Other Income 117 117 0.2 96 21.1
PBT 700 543 28.7 318 120.3
Ta x 233 183 26.9 106 120.6
PAT 467 360 29.7 212 120.2
Adjusted PAT 467 360 29.7 212 120.2
EBITDA Margin (%) 25.3 22.4 286 bps 15.4 987 bps
EBIT Margin (%) 24.1 21.0 308 bps 13.5 1057 bps
Net Prot Margin (%) 19.2 16.8 239 bps 12.7 649 bps
Source: Company, Karvy Research
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Apr 30, 2018
Tata Sponge Iron Ltd
Exhibit 3: Segmental Financials
YE Mar (Rs. Mn) Q4FY18 Q3FY18 QoQ % Q4FY17 YoY %
Segment-wise revenues
Sponge Iron 2296 1993 15.2 1723 33.2
Power 180 203 (11.4) 163 10.2
Segment-wise EBITDA
Sponge Iron 428 331 29.5 116 268.6
Power 167 126 32.3 120 39.7
Segment-wise EBITDA Margin (%)
Sponge Iron 18.7 16.6 206 bps 6.7 1191 bps
Power 93.0 62.3 3073 bps 73.4 1960 bps
Source: Company, Karvy Research
It is good that the company
is delivering a good
performance in its both
business verticals.
Exhibit 4: QoQ Revenue and Growth
Source: Company, Karvy Research
Exhibit 6: QoQ PAT, Growth and Margin
Source: Company, Karvy Research
Exhibit 8: QoQ Sponge Iron Revenue and Growth
Source: Company, Karvy Research
Exhibit 5: QoQ Operating Profit, Growth and Margin
Source: Company, Karvy Research
Exhibit 7: QoQ EPS and Growth
Source: Company, Karvy Research
Exhibit 9: QoQ Power Revenue and Growth
Source: Company, Karvy Research
-30%
-20%
-10%
0%
10%
20%
30%
40%
0
500
1000
1500
2000
2500
Q3FY16
Q4FY16
Q1FY17
Q2FY17
Q3FY17
Q4FY17
Q1FY18
Q2FY18
Q3FY18
Q4FY18
Trend (%)
-200%
0%
200%
400%
600%
0
200
400
600
Q3FY16
Q4FY16
Q1FY17
Q2FY17
Q3FY17
Q4FY17
Q1FY18
Q2FY18
Q3FY18
Q4FY18
EBITDA (Rs. Mn)
QoQ Growth/Decline (%)
EBITDA Margin (%)
-50%
0%
50%
100%
150%
0
100
200
300
400
500
Q3FY16
Q4FY16
Q1FY17
Q2FY17
Q3FY17
Q4FY17
Q1FY18
Q2FY18
Q3FY18
Q4FY18
PAT (Rs. Mn)
QoQ Growth/Decline (%)
PAT Margin (%)
-50%
0%
50%
100%
150%
200%
0
10
20
30
Q3 FY16
Q4 FY16
Q1 FY17
Q2 FY17
Q3FY17
Q4FY17
Q1FY18
Q2FY18
Q3FY18
Q4FY18
EPS (Rs.)
QoQ Growth/Decline (%)
-30%
-15%
0%
15%
30%
45%
0
500
1000
1500
2000
Q3 FY16
Q4 FY16
Q1 FY17
Q2 FY17
Q3FY17
Q4FY17
Q1FY18
Q2FY18
Q3FY18
Q4FY18
Sponge Iron Revenue (Rs. Mn)
QoQ Growth/Decline (%)
-40%
-20%
0%
20%
40%
60%
0
50
100
150
200
250
Q3 FY16
Q4 FY16
Q1 FY17
Q2 FY17
Q3FY17
Q4FY17
Q1FY18
Q2FY18
Q3FY18
Q4FY18
Power Revenue (Rs. Mn)
QoQ Growth/Decline (%)
4
Apr 30, 2018
Tata Sponge Iron Ltd
Valuation for the company
looks attractive as it is
presently valued below its
5-year average valuation.
Exhibit 10: QoQ Sponge Iron Revenue contribution in Percentage
Source: Company, Karvy Research
Exhibit 11: QoQ Power Revenue Contribution in Percentage
Source: Company, Karvy Research
Exhibit 13: Tata Sponge - 5yr PE Band
Source: Bloomberg, Karvy Research
Exhibit 14: NSE Metal - 5yr PE Band
Source: Bloomberg, Karvy Research
Exhibit 12: Change in Earnings Estimates
YE Mar - Standalone (Rs. Mn)
FY19E FY20E
Old New % Change Old New % Change
Net Sales 7800 8466 8.5 8050 8805 9.4
EBITDA 1186 1986 67.5 1186 2124 79.1
EBITDA Margin (%) 15.2 23.5 826 bps 15.2 24.1 892 bps
Adj. PAT 1081 1561 44.4 1134 1689 49.0
EPS (Rs.) 70 101 44.4 74 110 49.0
Source: Karvy Research
84%
86%
88%
90%
92%
94%
Q2 FY16
Q3 FY16
Q4 FY16
Q1 FY17
Q2 FY17
Q3FY17
Q4FY17
Q1FY18
Q2FY18
Q3FY18
Q4FY18
Sponge Iron Revenue (%)
5%
7%
9%
11%
13%
15%
Q2 FY16
Q3 FY16
Q4 FY16
Q1 FY17
Q2 FY17
Q3FY17
Q4FY17
Q1FY18
Q2FY18
Q3FY18
Q4FY18
Power Revenue (%)
0
5
10
15
May-13
Jul-13
Sep-13
Nov-13
Jan-14
Mar-14
May-14
Jul-14
Sep-14
Nov-14
Jan-15
Mar-15
May
-15
Jul
-15
Sep-15
Nov-15
Jan-16
Mar-16
May-16
Jul-16
Sep-16
Nov-16
Jan-17
Mar-17
May-17
Jul-17
Sep-17
Nov-17
Jan-18
Mar-18
1yr forward PE
Avg. PE
1 SD
2 SD
-1 SD
-2SD
-10
5
20
35
50
65
Apr-14
Jun-14
Aug-14
Oct-14
Dec-14
Feb-15
Apr-15
Jun-15
Aug-15
Oct-15
Dec-15
Feb-16
Apr-16
Jun-16
Aug-16
Oct-16
Dec-16
Feb-17
Apr-17
Jun-17
Aug-17
Oct-17
Dec-17
Feb-18
Apr-18
1yr forward PE
Avg. PE
1 SD
2 SD
-1 SD
-2SD
5
Apr 30, 2018
Tata Sponge Iron Ltd
Financials
Exhibit 15: Income Statement
YE Mar (Rs. Mn) FY16 FY17 FY18 FY19E FY20E
Revenues 5735 5573 8002 8466 8805
Growth (%) (27.0) (2.8) 32.8 5.8 4.0
Operating Expenses 5496 4957 6175 6480 6681
EBITDA 240 616 1827 1986 2124
Growth (%) (75.9) 157.4 196.4 8.7 6.9
Depreciation & Amortization 129 128 123 132 133
EBIT 111 489 1704 1855 1991
Other Income 377 371 431 457 497
Interest Expenses 54 24 33 41 38
PBT 434 835 2102 2270 2451
Tax 115 247 693 709 762
Adjusted PAT 319 588 1409 1561 1689
Growth (%) (65.3) 84.0 139.7 10.8 8.2
Source: Company, Karvy Research
Exhibit 16: Balance Sheet
YE Mar (Rs. Mn) FY16 FY17 FY18 FY19E FY20E
Cash & Cash Equivalents 2521 3068 4216 5281 6483
Trade Receivable 294 358 588 619 636
Inventory 324 491 841 691 732
Other Financial Assets 2 104 734 810 939
Investments 2854 2634 1997 2010 2023
Net Block 1730 1603 1548 1609 1643
Miscellaneous 2150 2202 2219 2276 2344
Total Assets 9875 10459 12144 13297 14800
Liabilities & Provisions 1614 1810 2278 2241 2426
Debt (LT + ST) 0 0 0 0 0
Total Liabilities 1614 1810 2278 2241 2426
Equity Capital 154 154 154 154 154
Reserves & Surplus 8106 8495 9711 10901 12220
Total Networth 8260 8649 9865 11055 12374
Total Networth & Liabilities 9875 10459 12144 13297 14800
Source: Company, Karvy Research
The performance of
the company in FY18
in particular, has been
encouraging, as it
witnessed a positive
growth at sales, EBITDA
and net prot fronts.
Balance sheet presents
an increasing trend in
cash & cash equivalents
and shareholders equity
which reects upon sound
nancial health of the
company.
6
Apr 30, 2018
Tata Sponge Iron Ltd
Exhibit 17: Cash Flow Statement
YE Mar (Rs. Mn) FY16 FY17 FY18E FY19E FY20E
PBT 434 835 2102 2270 2451
Depreciation 129 128 123 132 133
Interest 54 24 33 41 38
Tax Paid (125) (184) (693) (709) (762)
Changes in WC 638 (252) (1362) (182) (153)
Others (360) (356) (431) (457) (497)
Cash ow from operating activities 771 195 (228) 1095 1209
Inc/dec in capital expenditure (172) (39) (68) (193) (166)
Others (412) 575 (2004) 3535 484
Cash ow from investing activities (584) 536 (2071) 3342 318
Dividend paid (152) (153) (308) (308) (308)
Interest paid 0 0 (33) (41) (38)
Others (31) (31) (63) 68 20
Cash ow from nancing activities (183) (185) (403) (281) (326)
Net change in cash 3 546 (2703) 4156 1202
Source: Company, Karvy Research
Exhibit 18: Key Ratios
YE Mar FY16 FY17 FY18 FY19E FY20E
EBITDA Margin (%) 4.2 11.1 22.8 23.5 24.1
EBIT Margin (%) 1.9 8.8 21.3 21.9 22.6
Net Prot Margin (%) 5.6 10.5 17.6 18.4 19.2
Dividend Payout Ratio (%) 48.2 28.8 21.9 19.7 18.2
Net Debt/Equity (x) (0.3) (0.4) (0.4) (0.5) (0.5)
RoE (%) 3.9 7.0 15.2 14.9 14.4
RoCE (%) 1.3 5.8 18.4 17.7 17.0
Source: Company, Karvy Research
Exhibit 19: Valuation Parameters
YE Mar FY16 FY17 FY18 FY19E FY20E
EPS (Rs.) 20.7 38.2 91.5 101.4 109.7
DPS (Rs.) 10.0 11.0 20.0 20.0 20.0
BVPS (Rs.) 536.4 561.6 640.6 717.9 803.5
PE (x) 22.6 18.3 10.1 10.6 9.8
P/BV (x) 0.9 1.2 1.4 1.5 1.3
EV/EBITDA (x) 19.6 12.5 5.5 5.6 4.7
EV/Sales (x) 0.7 1.3 1.2 1.3 1.1
Source: Company, Karvy Research; *Represents multiples for FY16 - FY18 are based on historic market price
We expect working capital
to improve in FY19E and
FY20E.
Positive momentum in
bottom line will make
valuation parameters
further attractive.
7
Apr 30, 2018
Tata Sponge Iron Ltd
Stock Ratings Absolute Returns
Buy : > 15%
Hold : 5-15%
Sell : < 5%
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mentioned therein, certify (ies) that the views expressed herein accurately reect his (their) personal view(s) about the subject security (ies) and issuer(s)
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