Buy Tata Sponge Iron, target Rs 977: Kotak Securities

Kotak Securities has a buy call on Tata Sponge Iron with a target price of Rs 977.

The current market price of Tata Sponge Iron is Rs 817.50.

Time period given by the brokerage is one year when Tata Sponge Iron price can reach the defined target.


View of the brokerage on the company:
Tata Sponge (TTSP) Q2FY19 reported numbers were below our estimates, due to higher iron ore and maintenance costs, which offset the benefit of 3.1 per cent sequential growth in realisation, resulting in 930bps sequential decline in EBITDA margin to 13.8 per cent.

Key Highlights
Sponge iron sales volume during the quarter declined 19.13 per cent QoQ (marginally up YoY) to 93KT, due to a maintenance shutdown. The sponge iron realisation increased 30.5 per cent/3.1 per cent YoY/QoQ to Rs22,047/tonne.

Clarity on steel capex is still uncertain. Cash at the end of 1HFY19 stands at Rs7 bn.

Management reiterated confidence in meeting its full-year production guidance of 425kt of sponge iron with strong volumes in H2FY19. We are building in 421KT and 425KT of volume for FY19E and FY20E, respectively. Management has applied for the fresh environmental clearance to further enhance its capacity to 465KT.

Valuation & outlook
We continue to remain positive on TTSP's strong business model. The recent increase in iron ore costs and coal prices (due to the rupee depreciation), we feel spread would remain subdued in the coming quarters as well.

Factoring this, we have revised our earnings estimates downwards to Rs 96.8 (earlier Rs 98.5) and Rs 89.4 (earlier Rs 98.7) for FY19E and FY20E, respectively.

Sponge iron realisation declined by Rs 2,700/tonne from its high of Rs 26,700/tonne in the month of September 2018.

Post the recent correction in the stock price, we feel at CMP, the stock is trading at 2.6x FY20E EV/EBITDA, is attractive and risk-reward is favorable.

Hence, we upgrade to buy(earlier Accumulate) rating, with a revised target price of Rs 977 (earlier Rs 1,055), valuing it at 4x FY20 EBITDA. We have not assigned any value to the investment of Rs 1.8bn made by the company on the coal block.