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Buy Tata Steel – ABN Amro

June 18, 2007

The Steel stocks are all on fire. Sharekhan and HDFC upgraded JSW steel to a BUY. Now ABN Amro has put a BUY on Tata Steel with a price target of Rs 700.

Tata Steel’s bold move to acquire Corus will lift its profits sufficiently to overcome equity dilution. ABN expects its strategy of pursuing high-value, high-growth markets, while growing its low-cost production base, to deliver strong returns. Tata Steel’s consolidated profits will increase 89% in FY08, while EPS on a fully-diluted basis will rise 25%. In ABN’s opinion, the market has focused on the potential 41% increase in issued shares, but may have underestimated the earnings contribution Corus can offer.

Tata Steel will deliver an average EPS CAGR of 23% over FY08-10, with sales volumes boosted by the Corus acquisition plus further expansion of its facilities and given a robust steel price outlook in Europe and India. ABN Amro reiterates Buy rating on the stock, with an increased price target of Rs 700, based on 2x FY08E P/B.

Tata Steel’s projections by ABN Amro.
Tata Steel is likely to report full year revenue of Rs 1173388 1188933 1232227 million for FY08 FY09 and FY10. Fully diluted EPS is expected to be around Rs 93.3, Rs 110 and Rs 113 for the corresponding years.

One should not be surprised even if the stock surpasses Rs 700.

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