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ENAM Neutral on Tata Steel

September 4, 2007

ENAM India Research has maintained a neutral rating on the prospects of Tata Steel with a price target of Rs 657 because of the short term challenges the company is facing rather than the long term gains.

  • Equity raising and capacity expansion are the key to future success of Tata Steel
  • Higher interest costs on bridge debt financing
  • Tax inefficiencies for one of the SPVs (Tata Steel Asia)
  • Improving margin by enhancing integrated operations in India

Robust demand growth, driven by strong consumption in China and other EMs. Large Chinese capacity addition to replace old capacities and also for local consumptions. Iron ore – Spot iron of prices currently 50% higher than current contract prices. Expected to rise significantly next
year. Coking coal – prices are expected to move higher next year.

Key risks include financial leverage and low operating margin. Thus maintain a NEUTRAL rating on the stock.

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