TATA steel announced the signing of MoU with Klesch Group to undertake detailed due diligence and negotiations for the potential sale of its long products Europe (LPE) business. Post this deal, entire of Tata steel Europe's (TSE) volume would come from Strip products which has better demand outlook compared to Longs.

1. Tata Steel
Sale of Long products Europe‐ a right move
October 16, 2014
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Event Update
Kamlesh Bagmar
kamleshbagmar@plindia.com
+91‐22‐66322237
Rating Accumulate
Price Rs456
Target Price Rs520
Implied Upside 14.0%
Sensex 26,349
Nifty 7,864
(Prices as on October 14, 2014)
Trading data
Market Cap. (Rs bn) 437.1
Shares o/s (m) 958.5
3M Avg. Daily value (Rs m) 6101.6
Major shareholders
Promoters 31.35%
Foreign 18.43%
Domestic Inst. 24.50%
Public & Other 25.72%
Stock Performance
(%) 1M 6M 12M
Absolute (11.6) 8.6 51.2
Relative (9.0) (7.8) 23.3
How we differ from Consensus
EPS (Rs) PL Cons. % Diff.
2015 43.7 44.9 ‐2.5
2016 53.0 53.9 ‐1.7
Price Performance (RIC: TISC.BO, BB: TATA IN)
Source: Bloomberg
Apr‐14
Jun‐14
Aug‐14
Oct‐14
(Rs)
TATA steel (TATA) announced the signing of MoU with Klesch Group to undertake
detailed due diligence and negotiations for the potential sale of its long products
Europe (LPE) business and associated distribution activities. With crude steel
production of 3.2m tonnes and deliveries of 2.8m tonnes, LPE's capacity utilisation
was restricted to ~70% for past couple of years due to weak demand from the
construction sector as against strip product's utilisation of ~95%. We believe that
this deal would add in the range of Rs20/share in form of lower interest cost and
capex; assuming consideration at US$1bn for the transaction.
 Sale of LPE, a positive move: Post this deal, entire of Tata steel Europe's (TSE)
volume would come from Strip products which has better demand outlook
compared to Longs. These operations were plagued by high employee cost, low
scale and high overhead cost despite series of cost reduction initiatives
undertaken by the management over past six years. About 6,500 people are
employed at LPE and its distribution facilities which is way ahead of global
benchmarks. Given the sluggish outlook for Longs, company took an impairment
of £700m in FY13. Book value of the division stands at £350m.
 Valuation and Outlook: Stock has fallen ~16% in last couple of months for host
of concerns like sharp cut in global iron ore prices, regulatory issues on renewal
of mines in India and sluggish macro environment in Europe. We believe that
correction provides an attractive opportunity to enter in the stock given the
bottoming of global iron ore prices, strong transition of European operations
and likely loosening of irrational stand undertaken by state governments to halt
the renewal process. Hence, we upgrade the stock from Reduce to Accumulate
with TP of Rs520, EV/EBITDA of 6x FY16E.
Key financials (Y/e March) 2013 2014 2015E 2016E
Revenues (Rs m) 1,347,115 1,486,136 1,530,860 1,674,848
Growth (%) 1.4 10.3 3.0 9.4
EBITDA (Rs m) 123,212 164,110 185,631 211,579
PAT (Rs m) 3,323 36,225 42,471 51,460
EPS (Rs) 3.4 37.3 43.7 53.0
Growth (%) (83.6) 990.3 17.2 21.2
Net DPS (Rs) 8.0 10.0 10.0 10.0
Profitability & Valuation 2013 2014 2015E 2016E
EBITDA margin (%) 9.1 11.0 12.1 12.6
RoE (%) 0.9 9.8 10.1 11.2
RoCE (%) 2.6 5.7 5.7 6.5
EV / sales (x) 0.8 0.8 0.8 0.7
EV / EBITDA (x) 8.5 7.1 6.5 5.7
PE (x) 133.3 12.2 10.4 8.6
P / BV (x) 1.3 1.1 1.0 0.9
Net dividend yield (%) 1.8 2.2 2.2 2.2
Source: Company Data; PL Research

2. Tata Steel
Exhibit 1: Value accretion due to transaction assuming consideration at US$1bn
Consideration (US$ m) 1000
Volumes (mn tonnes) 3.0
EBITDA/t (US$) 50
EBITDA (US$ m) 150
EV based on 5.5x EBITDA 825
Value in excess of factored by market 175
Savings in interest 50
Maintenance capex 80
Total accretion to share holder's value (US$ m) 305
In Rs 18,300
Per share basis 18.8
Source: Company Data, PL Research
Exhibit 2: Tata Steel’s Long Products Europe include
Scunthorpe integrated steelworks Immingham Bulk Terminal (port terminal)
Teesside Beam Mill, Lackenby Hayange Rail Mill, north east France
Special Profiles, Skinningrove & Darlington Engineering workshop, Workington
Dalzell Plate Mill, Scotland Rail consultancy, York
Clydebridge, Scotland
Source: Company Data, PL Research
Exhibit 3: The associated distributed sites include:
Teesside Newton Abbot
Scunthorpe (two locations) Stoke
Newcastle Lisburn, Northern Ireland
Edinburgh, Scotland Dublin, Ireland
Dundee Cork, Ireland
Mosstodloch, Scotland Mülheim, Germany
Hull Zwickau, Germany
Wolverhampton Hamburg, Germany
Dartford Stuttgart, Germany
Brandon
Source: Company Data, PL Research
October 16, 2014 2

3. Tata Steel
Income Statement (Rs m)
Y/e March 2013 2014 2015E 2016E
Net Revenue 1,347,115 1,486,136 1,530,860 1,674,848
Raw Material Expenses 605,363 627,365 659,163 717,002
Gross Profit 741,753 858,770 871,698 957,847
Employee Cost 189,183 203,034 215,237 234,123
Other Expenses 429,358 491,626 470,830 512,144
EBITDA 123,212 164,110 185,631 211,579
Depr. & Amortization 55,753 58,412 65,678 75,402
Net Interest 39,681 43,368 49,434 53,412
Other Income (69,107) 4,892 14,913 7,568
Profit before Tax (41,330) 67,221 85,432 90,333
Total Tax 32,294 30,582 37,424 41,971
Profit after Tax (73,624) 36,640 48,008 48,361
Ex‐Od items / Min. Int. (75,140) 431 8,457 (173)
Adj. PAT 3,323 36,225 42,471 51,460
Avg. Shares O/S (m) 971.4 971.4 971.4 971.4
EPS (Rs.) 3.4 37.3 43.7 53.0
Cash Flow Abstract (Rs m)
Y/e March 2013 2014 2015E 2016E
C/F from Operations 140,353 131,458 167,529 167,220
C/F from Investing (132,969) (164,511) (144,941) (113,092)
C/F from Financing (20,254) 10,091 (37,611) (87,361)
Inc. / Dec. in Cash (12,870) (22,961) (15,023) (33,234)
Opening Cash 108,410 98,922 87,045 72,022
Closing Cash 98,922 87,045 72,022 38,788
FCFF (153,024) (112,833) 63,779 (213,099)
FCFE (66,918) 18,180 79,421 (233,099)
Key Financial Metrics
Y/e March 2013 2014 2015E 2016E
Growth
Revenue (%) 1.4 10.3 3.0 9.4
EBITDA (%) (0.8) 33.2 13.1 14.0
PAT (%) (83.6) 990.3 17.2 21.2
EPS (%) (83.6) 990.3 17.2 21.2
Profitability
EBITDA Margin (%) 9.1 11.0 12.1 12.6
PAT Margin (%) 0.2 2.4 2.8 3.1
RoCE (%) 2.6 5.7 5.7 6.5
RoE (%) 0.9 9.8 10.1 11.2
Balance Sheet
Net Debt : Equity 1.8 1.8 1.7 1.6
Net Wrkng Cap. (days) 9 1 (5) —
Valuation
PER (x) 133.3 12.2 10.4 8.6
P / B (x) 1.3 1.1 1.0 0.9
EV / EBITDA (x) 8.5 7.1 6.5 5.7
EV / Sales (x) 0.8 0.8 0.8 0.7
Earnings Quality
Eff. Tax Rate (78.1) 45.5 43.8 46.5
Other Inc / PBT 14.7 7.7 7.8 8.4
Eff. Depr. Rate (%) 4.2 3.8 4.1 3.9
FCFE / PAT (2,014.0) 50.2 187.0 (453.0)
Source: Company Data, PL Research.
Balance Sheet Abstract (Rs m)
Y/e March 2013 2014 2015E 2016E
Shareholder's Funds 338,139 402,000 440,310 478,685
Total Debt 707,823 838,837 854,478 834,478
Other Liabilities 48,456 43,535 44,633 56,706
Total Liabilities 1,094,418 1,284,372 1,339,422 1,369,869
Net Fixed Assets 720,082 876,314 974,898 1,018,156
Goodwill 130,650 157,488 157,488 157,488
Investments 24,974 24,251 9,944 11,406
Net Current Assets 221,931 229,230 200,004 185,731
Cash & Equivalents 106,524 113,729 98,706 65,472
Other Current Assets 486,534 544,255 529,636 575,991
Current Liabilities 371,127 428,754 428,339 455,733
Other Assets (3,219) (2,912) (2,912) (2,912)
Total Assets 1,094,418 1,284,372 1,339,422 1,369,869
Quarterly Financials (Rs m)
Y/e March Q3FY14 Q4FY14 Q1FY15 Q2FY15E
Net Revenue 367,358 424,281 364,272 373,582
EBITDA 40,065 50,111 42,726 40,299
% of revenue 10.9 11.8 11.7 10.8
Depr. & Amortization 15,221 14,719 15,503 16,000
Net Interest 11,084 11,694 12,524 12,000
Other Income 181 1,117 2,161 2,200
Profit before Tax 13,946 24,357 14,236 14,499
Total Tax 8,951 13,645 10,804 8,760
Profit after Tax 5,032 10,359 3,373 5,619
Adj. PAT 5,028 10,817 5,998 5,619
Key Operating Metrics
Y/e March 2013 2014 2015E 2016E
Rev. Indian Op. (US$ m) 7,022 6,898 7,244 8,610
Rev.Corus (US$ m) 14,503 14,066 13,580 14,400
Rev. South East (US$ m) 2,543 2,810 3,150 3,285
EBITDA‐India (US$ m) 2,045 2,120 2,219 2,590
EBITDA‐Corus (US$ m) 142 500 700 720
EBITDA‐South East (US$ m) 88.4 72.4 99.0 99.0
Volume (mt)‐India 7.5 8.5 8.7 10.4
Real./ Tonne‐ India (Rs) 37,784 35,157 36,645 37,167
EBITDA/Tonne‐ India (Rs) 14,869 15,050 15,237 14,920
SalesVol.‐Corus (mt) 13.1 13.9 14.0 14.4
Real./Tonne‐Corus (US$) 1,109.6 1,014.9 970.0 1,000.0
EBITDA/Tonne‐Corus (US$) 10.8 36.1 50.0 50.0
Sales Vol.‐South East (mt) 3.0 4.0 4.5 4.5
Real./Tonne‐SEAN (US$) 836.4 706.0 700.0 730.0
EBITDA/Tonne‐SEAN (US$) 29.1 18.2 22.0 22.0
Source: Company Data, PL Research.
October 16, 2014 3

4. Tata Steel
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Tel: (91 22) 6632 2222 Fax: (91 22) 6632 2209
Rating Distribution of Research Coverage
31.3%
51.8%
17.0%
0.0%
60%
50%
40%
30%
20%
10%
0%
BUY Accumulate Reduce Sell
% of Total Coverage
PL’s Recommendation Nomenclature
BUY : Over 15% Outperformance to Sensex over 12‐months Accumulate : Outperformance to Sensex over 12‐months
Reduce : Underperformance to Sensex over 12‐months Sell : Over 15% underperformance to Sensex over 12‐months
Trading Buy : Over 10% absolute upside in 1‐month Trading Sell : Over 10% absolute decline in 1‐month
Not Rated (NR) : No specific call on the stock Under Review (UR) : Rating likely to change shortly
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October 16, 2014 4