Tata Steel

India Equity Research | Metals & Mining Company Update

TATA STEEL INR 935

Big is beautiful BUY

A closer look at Tata Steel’s position as the world’s sixth-largest steel player reveals some key
insights: December 31, 2007

♦ Apart from Arcelor Mittal, Tata Steel is the only globally leading player, with strong presence
Prasad Baji
in both Asia and Europe. This unique position gives it the benefits of: +91-22-2286 4248
(i) scale and premium positioning (due to its European operations); and (ii) strong margins prasad.baji@edelcap.com

and volume-based growth (due to its Asian operations). Amit Dixit

+91-22-4019 4755
♦ Tata Steel is among the top 10 global players in both flats and longs, unlike many other amit.dixit@edelcap.com
leading players (such as POSCO, US Steel, and Thyssen), who are present in only one of Vinay Chokhra
the two segments. This balanced presence derisks Tata Steel’s business significantly and +91-22-2286 4280
vinay.chokhra@edelcap.com
enables it to benefit from the general steel upcycle that we are witnessing currently.

Truly, big can also be beautiful. We are positive about the following multi-pronged strategy that Tata
Steel is adopting and believe it is the foundation to sustainable success:
♦ Aggressively scale capacity in Asia, the growth engine for global steel. Current steel making
capacity of ~8mtpa in Asia is expected to reach ~37mtpa by CY15E.
♦ Maintain Corus’s market leading presence in premium products.
♦ Improve raw material security. The recent strategic investments in Mozambique (coal) and Ivory
Coast (iron ore) are initiatives in this direction. Reuters : TISC.BO
Bloomberg : TATA IN
Outlook and valuations: Strong, visible earnings growth; maintain ‘BUY’

Corus’s EBITDA margins have improved from 6.9% in CY06 to an estimated 10.5% currently Market Data

led by strong European steel prices which have surprised on the upside. Overall, going 52-week range (INR) : 1,049 / 399
forward, we are confident of the current EBITDA margins being maintained at Corus led by Share in issue (mn) : 730.7
expected price increases, increase in capacity utilization (up from 88% in FY07 to 96% in M cap (INR bn/USD mn) :683.2/17,257.0
FY09E) and cost savings/synergy benefits (of USD 40 mn in FY09E). As a result, Avg. Daily Vol. BSE/NSE (‘000) : 4,165.5
consolidated PAT and EPS are expected to increase by 32% and 22%, respectively, in
FY09E. We have valued each of the three key geographical segments of the company viz.,
Europe, India, and South East Asia by comparing with respective peers and arriving at Share Holding Pattern (%)
applicable FY09E EV/EBITDA multiple for each geographical segment. We have been Promoters : 33.8
conservative in calculating the valuation multiples and hence, believe the risk to our fair MFs, FIs & Banks : 19.0
value per share is on the upside. Our fair value per share for Tata Steel works out to FIIs : 21.4
INR 1,219. We maintain ‘BUY’. Others : 25.8
Financials (consolidated)
Year to March FY07* FY08E FY09E FY10E
Revenues (INR mn) 252,133 1,191,923 1,309,622 1,320,137
Rev. growth (%) 2,406.8 37,273.6 987.5 80.3 1,200 7,000
EBITDA (INR mn) 74,502 185,844 226,018 225,368
Net profit (INR mn) 41,773 95,712 126,394 116,698 900 5,250
('000)

Shares outstanding (mn) 580 822 893 893

(INR)

600 3,500
EPS (INR) 72.0 116.4 141.6 130.7
EPS growth (%) 6.6 61.6 21.6 (7.7) 300 1,750
P/E (x) 13.0 8.0 6.6 7.2
EV/EBITDA (x) 9.2 7.3 6.1 6.1 - -
ROE (%) 33.5 45.0 39.8 30.5 Dec-06 Jun-07 Dec-07
* without Corus
Edelweiss Research is also available on Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.
1
Tata Steel

Investment Rationale

Unique geographical presence in Asia and Europe

Tata Steel is the only globally leading player, besides Arcelor Mittal, with strong presence in both
Asia and Europe. This unique position provides the company the benefits of: (i) scale and
premium positioning (due to its European operations); and (ii) strong margins and volume-based
growth (due to its Asian operations). European operations accounted for more than three-fourth
of revenues, while Asian operations accounted for nearly 60% of EBITDA in FY07 (see Charts 1
and 2).

In the near term, we expect the high prices and volume from European operations to drive
revenues while low cost Asian operations are expected to maintain profitability. In the long term,
we expect Tata Steel’s Asian operations to show strong volume growth with margins being
maintained, while in Europe we expect significant margin improvement due to captive raw
material with small increase in volume. The recent strategic investments in Ivory Coast for iron
ore (75% stake; reserves said to be between 700 mn tonnes and 1,000 mn tonnes) and
Riversdale Mining for coking and thermal coal (35% stake; inferred resources of ~105 mn
tonnes) are initiatives to strengthen raw material security at Corus. Tata Steel has guided for a
raw material security of 60-80% in the next five years. We believe that with the above two mines
expected to commence in about three years and considering their potential to meet all of
Corus’s requirements, this target could possibly be surpassed and the company is likely to have
90% plus raw material security.

Chart 1: European operations (Corus) accounted for 77% of revenue in FY07

S.E. Asia
7%

India
16%
Europe
77%

Source: Company data

2
Tata Steel

Chart 2: Asian operations accounted for 57% of EBITDA in FY07

S.E. Asia
4%

India
53%
Europe
43%

Source: Company data

Truly global company with diversified revenue mix

In our view, a global steel company must not only have geographically diversified sales but also
manufacturing facilities located in different regions, enabling it to enjoy benefits realized locally.

Chart 3: Tata Steel: Leapfrogging into the global league

10
Arcelor Mittal

Geographical diversity
Corus acqusition has enabled Tata Steel
to become a diverse, global player Tata Corus
6

4
Tata Steel US Steel Riva
(before) Posco 2
Nucor
Nippon
Tangshan Baosteel JFE
0
0 9 18 27 36 45
Portfolio diversity

Source: Edelweiss research

As set out in Charts 3 and 4, on this scale, we consider Tata Steel more global than its Asian
counterparts such as Baosteel, POSCO, JFE, and Nippon (with presence only in Asia) or
European counterparts such as Thyssen Krupp and Riva (with presence only in Europe).

3
Tata Steel

Chart 4: Tata Steel’s facilities spread all over the globe

Source: Company data

From a primarily India-centric sales structure prior to the Corus acquisition, Tata Steel earns
close to 37% of its revenue from Europe and 8% from the reviving North American markets
(Charts 5 and 6).

Chart 5: Revenue mix of Tata Steel India (pre acquisition)

Other-Asia
23%

India
69% ROW
8%

Source: Company data

4
Tata Steel

Chart 6: Consolidated revenue mix (post acquisition)

North America
8% UK
22%

Europe
37%

Asia
24%

ROW
9%

Source: Company data

Earlier, the acquisition of Singapore-based NatSteel and Thailand’s Millennium Steel gave Tata
Steel access to six key Asian steel markets—China, Thailand, Vietnam, Malaysia, Australia, and
Philippines. Thus, among the global top ten players, Tata Steel has a huge footprint in South
East Asia surpassing even that of Arcelor Mittal and the company is well placed to tap emerging
opportunities in the Asian market.

Europe and NAFTA likely to account for ~45% of global premium flats in CY10E….
Global premium flats consumption (see Chart 7) is expected to grow at a CAGR of 6.4%
through CY15E while consumption of total flats (including commodity flats) is likely to grow at a
CAGR of 3.4% over the same period. Europe and NAFTA, Corus’s primary markets, are
expected to account for ~45% of total premium products consumption in CY10E, followed by
Asia at 22% (Chart 8).

Chart 7: Premium products demand through CY15E

800
Global demand for premium products
expected to grow at 6.4% CAGR
700

600
mtpa

500

400

300
2005 2010E 2015E

Commodities Premium products

Source: CRU

5
Tata Steel

Chart 8: Premium products demand split in CY10E

ROW
8%

Asia
22%
Europe
24%
220mtpa

China North America

19% 20%

CIS
South America
4%
3%

Source: CRU

We view this as positive for the company, since it opens fresh opportunities to increase its
value-added portfolio, realizations, and improve profitability.

…..flats’ realisation expected to rise by USD 80/tonne in FY09E

European steel prices have risen throughout CY07 and have surprised on the upside in Q3CY07.
CY08/FY09E should see significant increase in raw material prices leading to cost push on steel
prices in a firm demand environment. We are estimating iron ore costs to increase by 35%,
coking coal/coke costs by 25%, and flats’ blended realizations to increase by 9.7% (all in USD
terms) in CY08-09 for Corus. We estimate the absolute increase in flats blended realization for
Corus in FY09E to be ~USD 80/tonne in comparison to total expected increase in raw material
cost of ~USD 110/tonne (of steel). Considering Corus’s premium products and market standing
and the overall firm demand conditions in Europe, we are confident that the company will be
able to effect such an increase. According to market sources Arcelor Mittal is contemplating a
price hike of USD 110/tonne for HRC for CY08 (in comparison our assumption of USD 80/tonne
increase for Corus is for a more valued-added flats basket, including CRC and galvanized steel)
so as to pass on the entire increase in raw material costs.

In the US, steel prices have started moving up in recent months. Although demand
fundamentals in the US are still far from encouraging, factors such as low import pressure due
to Chinese government’s export policy, weak US dollar with respect to Euro (which has caused
European prices to remain at premium to US prices since the beginning of this year) and
continued destocking since December 2006 which has pushed stocks at service centers to
extremely low levels, have pushed prices up. Since September 2007, steel makers in the US
have been trying (and succeeded) to effect price hikes. In flats, after a first round of hikes in
Q4CY07 of USD 30-40/s. tonne, steel makers are pushing for another hike of the same
quantum. In longs, after two successful price hikes of USD 30/s.tonne each for October and
November deliveries, Arcelor Mittal is trying for a further hike of USD 40/s.tonne for January
deliveries.

International Iron and Steel Institute (IISI) has forecast a 4% steel demand growth in the US for
CY08. Hence, we believe, US steel makers (like their European counterparts) will not settle for
any margin squeeze due to high raw material prices and expect prices to remain firm for the
next year.

6
Tata Steel

Asian steel consumption likely to grow at 9% on an average until CY08E

We expect Asia to continue to be the driver of global steel consumption in CY08E. As
compared to global steel consumption growth of 6.8% on an average in CY08E, Asian steel
consumption is expected to grow at ~9% in CY08E (Table 1).

Table 1: Steel consumption expected to grow at average 9% in Asia until CY08E (mt)
Regions CY06 CY07E CY08E % 05/06 % 06/07E % 07/08E
EU-27 184.9 192.2 195.0 11.4 4.0 1.4
Other Europe 27.2 29.3 31.0 11.0 7.8 5.7
C.I.S. 50.0 59.8 65.2 18.1 19.5 8.9
N.A.F.T.A. 155.7 148.1 153.9 11.5 (4.9) 4.0
Central & South America 35.6 39.5 41.6 11.8 10.9 5.2
Africa 23.1 25.1 27.5 11.4 8.9 9.5
Middle East 37.3 40.4 43.4 9.8 8.4 7.5
Asia (inc. Oceania) 607.2 663.2 721.1 6.2 9.2 8.7
Total 1,121.0 1,197.6 1,278.7 8.8 6.8 6.8
Source: IISI

Steel up cycle more favorable for scaled players

We estimate the average incremental increase in EBITDA to be roughly around 4% for per unit
increase in revenue for Corus (assuming no change in cost structure). Besides having a unique
global presence, Tata Steel is also among the top 10 steel makers in both flats and longs.
Besides Tata Steel, only Arcelor Mittal, Nippon, JFE Steel, and the Riva Group have a significant
presence in both the products (see Tables 2 and 3). We believe this balanced presence in both
segments places Tata Steel in a better position to benefit from overall steel up cycle as we are
witnessing now.

Table 2: Ranking: Flats manufacturers Table 3: Ranking: Longs manufacturers

Company Base Capacity mtpa
Company Base Capacity mtpa
Mittal Arcelor UK 103.1
Mittal Arcelor UK 47.3
US Steel Group USA 31.6
Gerdau Group Brazil 19.5
Nippon Steel Japan 29.9
Evrazholding Russia 14.7
JFE Steel Group Japan 29.7 Tata Corus India 10.7
Posco Group Korea 25.6 Nippon Steel Japan 10.5
Shanghai Baosteel Group China 20.1 Industrial Union of Donbass Ukraine 10.1
Thyssen Krupp Stahl Germany 18.2 JFE Steel Group Japan 9.5
Tata Corus Group India 16.6 Nucor Group USA 8.9
China Steel Group Taiwan 12.7 Riva Group Italy 8.6
Riva Group Italy 12.0 Celsa Group Spain 8.2
Source: Steel World Source: Steel World

Except Arcelor Mittal, all the other steel players are geographically concentrated. This leaves
Arcelor Mittal and Tata Steel as the only two players who are spread geographically as well as
have a comprehensive product mix.

Future expansion: ~28mtpa capacity proposed to be added in India by CY15E

Tata Steel has ambitious plans to raise the total steel capacity of its Indian operations to 33
mtpa by CY15E from the current 5 mtpa (Table 4). This includes brownfield expansion at the
Jamshedpur plant and greenfield expansions at Orissa, Chhattisgarh, and Jharkhand.

7
Tata Steel

Table 4: Indian operations capacity proposed to be 33 mtpa by CY15E

Location Description Investment Operational status
Jamshedpur, India Boost current 5mtpa capacity by 1.8mtpa USD 1.1 bn Mid-2008
Increase flats capacity by 2.9mtpa USD 2.3 bn Post 2010
Orissa, India 6mtpa integrated steelworks: HRC, CRC, Longs USD 4.0 bn 2011
Jharkhand, India 12mtpa integrated steelworks: Slabs, HRC, CRC, Longs USD 10.0 bn To commence in 2012
Chhattisgarh, India 5mtpa integrated steelworks: Longs USD 3.5 bn To commence in 2012
Source: Company data, Edelweiss research

The greenfield projects will include captive iron ore mines in their scope. The comprehensive
nature of the proposed product range (encompassing both flats and longs) indicates that Tata
Steel is looking to maintain a balanced portfolio.

Shipments from Asian operations expected to be up 33% at nearly 12 mt in FY10E: We

are upbeat about expansion of Tata Steel’s Asian operations and expect a 33% increase in
shipments from Asian operations by FY10E (Chart 9).

Chart 9: Finished products sales expected at nearly 34mt by FY10E

35
India Europe S.E. Asia 4.9

3.6 28

(mn tonnes)
21
22.6
21.1
14

4.9 6.7
0
FY07 FY10E

Source: Company data, Edelweiss research

Multi-dimensional synergies with Corus expected at USD 450 mn

We expect synergies with Corus in all aspects of steel making—research and development,
technology sharing, portfolio enrichment, product and process flow, besides operational and
financial benefits due to scale (see Table 5).

Table 5: Multi-dimensional synergies with Corus

Dimensions
Synergies at Corus level
Synergies at Tata Steel (India) level
Financial synergies
Source: Company data, Edelweiss research
Description Amount
Raw material self sufficiency USD 250 mn
Value addition and de-bottlenecking
Higher capacity utilization
Negotiation with suppliers
Product portfolio enrichment USD 100 mn
IJmuiden best practices
Negotiation with suppliers
Tax synergies USD 100 mn
Interest cost reduction on Corus financing

8
Tata Steel

We expect these synergies to be realized ahead of schedule, given the management’s

commitment and groundwork towards achieving the same is already in progress.

Capacity utilization at Corus expected to go up in the next two years….

We expect Corus’s capacity utilization to go up in the next two years from 88% in FY07 to over
96% in FY10E (Table 6) as a result of de-bottlenecking and productivity improvement,
particularly at UK operations.

Table 6: Capacity utilization expected to go up at Corus

(mn tonnes) FY07 FY08E FY09E FY10E
Finished steel capacity 21.2 21.5 21.8 21.8
Finished steel production of which 18.8 20.5 20.9 20.9
Flats 11.3 12.5 12.9 12.9
Longs 7.5 8.0 8.0 8.0
Capacity utilization (%) 88.5 95.2 95.7 95.7
Source: Edelweiss research

Tata Steel has a history of having very high capacity utilization with its Jamshedpur plant
operating above 95% capacity utilization. We are confident of the company replicating this
model at Corus through sharing of shop floor practices.

Corus’s high end products align with Tata Steel’s strategic focus.…
Corus’s product profile remains top drawer with construction, automotive, and even steel used
in the aerospace industry and we expect Tata Steel to benefit from the same (Table 7). Corus’s
flats range encompasses mainly value-added products and currently controls 14% of the
European auto market.

Table 7: Flat products enrichment

Quarto plate Coiled plate HRC CRC HDG Prepainted Tinplate Electrical sheet
Tata √ √ √ √ √ √
Corus √ √ √ √ √ √ √
Source: Steel Business Briefing

This is in alignment with Tata Steel’s strategic focus. The latter has in recent times increased its
total market share in auto sales from 36% (~360kt) in 2003 to 44% (~870kt) in 2007 (Chart 10).

Chart 10: Focus on auto sector

70 50

56 40
% share (individual)

% share (total)

42 30

28 20

14 10

0 0
FY03 FY04 FY05 FY06 FY07
HRC CRC HDG Total (RHS)
Source: Company data

9
Tata Steel

Tata Steel has no experience in heavy sections in specialty longs. The deal not only widens
sales opportunities for structurals in Asia, but Corus’s beams-producing expertise can also be
channeled for Tata Steel going forward (Table 8).

Table 8: Long products enrichment

Heavy sections Medium sections Merchant bars Rails Rod Rebar Wire Welded tube Engg/ Alloy steel
Tata √ √ √ √ √ √ √
Corus √ √ √ √ √ √
Source: Steel Business Briefing

As in flats, this is also in alignment with Tata Steel’s focus on the domestic construction sector.
It has 26% market share in the construction sector products and we expect further gains for the
company from the new technologies Corus has to offer.

….provide proprietary products for domestic auto and construction sectors

Besides synergies arising from product portfolio enrichment, we are also optimistic on synergies
to be realized in R&D. Corus has a strong R&D unit which employs around 950 researchers
(Tata Steel employs 88). Apart from providing routine consultancy services, the team has been
involved in two innovative products—HybrelTM and Ymagine. The former is a pioneer product in
plating strip steel, a coating that combines properties of both metals and particles and the latter,
a light gauge, pickled and oiled steel used in the automotive and construction sectors.

We expect these proprietary technologies to complement Tata Steel’s brands which generated
INR 46 bn revenue in FY07.

Significant initiatives undertaken for improving Corus’s raw material security

We are upbeat about two very recent developments that further strengthen our belief that Tata
Steel will be able to improve margins at Corus through increased raw material security (Table 9).

The company has recently entered into a transaction with Riversdale Mining for 35% stake in
Benge and Tete coal mine licenses in Mozambique (inferred resources of ~105 mn tonnes) for
USD 88.2 mn. This entitles the company to a 40% off take of coking coal and 35% of non-
coking coal at commercial terms. We expect the development on this site to be easier since
infrastructure in the region has already been developed by Vale (earlier CVRD) which owns the
adjacent block. The company expects to share the cost of the infrastructure with Vale and start
production in three years at the latest.

Table 9: Raw material sufficiency improvement initiatives

Projects Details Status
Nimba iron ore project, Ivory Coast 75% stake in 700-1,000 mn tonnes reserves Agreement Signed
Benge and Tete licenses, Mozambique 35% stake in Riversdale’s Benge and Tete Agreement Signed
project (inferred reserves og 105 mn tonnes)
Australian coal mine 5% stake in Carborough Downs project (reserves Agreement Signed
58 mn tonnes)
Richard Bay (South Africa) Ferrochrome 135ktpa. Independent plant sourcing raw material December-07
project locally

Source: Company data, Edelweiss research

Besides this, Tata Steel has also acquired 75% equity stake in Mount Nimba iron ore mine in
Ivory Coast having 700-1,000 mn tonnes of iron ore reserves (preliminary estimates) with grade
above 60% by Fe content. Balance stake will be held by a state-owned enterprise. The
prospecting is still on and management expects to get the mine operational within three years.
This project could potentially involve an investment of USD 1.5 bn in the next three years to

10
Tata Steel
develop the mine as well as supporting infrastructure. The project is expected to involve
construction of a dedicated railway line and up gradation of the existing port infrastructure.

We believe that Tata Steel is likely to undertake further such strategic investments in the near
future and could end up with raw material self sufficiency of over 90%.

Other multiple growth initiatives in pipeline

Tata Steel has several other projects in the pipeline focusing on operational improvements at
Corus and adding more capacity mainly in Asia.

Corus: Another 0.6 mtpa capacity to come online by CY08E end

Two major projects are being carried out at total investment of GBP 317 mn for installing a new
continuous galvanizing line with a new three-stand CR mill at IJmuiden and sections mill at
Scunthorpe for specialty longs for the construction sector (Table 10).

Table 10: Corus projects

Location Description Investment Operational
(GBP mn) status
IJmuiden New galvanizing line and 3 stand CRM 170 End of 2008
Port Talbot Blast furnace 4 & 5 – Heat Recovery 14 End of 2007
Scunthorpe Section mill & rod mill 147 End of 2007
Teesside Slab caster enhancement 20 End of 2007
Source: Company data, Edelweiss research

Besides these, two other projects are in progress at Port Talbot and Teesside concentrating on
improving the operational efficiency of blast furnace and slab caster, respectively. We expect the
new capacity to come on line by CY08 and ramp up to happen in CY09/FY10E.

Looking for a foothold in other countries

The Middle East region throws up interesting possibilities in the coming few years. This region is
similar to the Mediterranean region and has been historically a trading region with almost no
domestic capacity. However, construction is being undertaken on at a great pace in this region
currently, thus bolstering the demand for specialty sections. We view the 3 mtpa Iranian project
(see Table 11) a positive step in this direction since it is based on DRI which is being used for
manufacturing high quality sections worldwide. The project is also expected to be cost effective
since energy forms a major chunk of the EAF cost which is available at low price in the gulf.
However, this project is also exposed to serious political risk due to its location in Iran. Except
for the Millennium Steel expansion we have not considered any of these projects in our earnings
model.

Table 11: Projects in other countries

Projects Details Status
Bandar Abbas, Iran 3mtpa DRI-based steelworks (for billets) MOU signed
Bangladesh 2.4mtpa steelworks Discussion stage
Coated steel JV with BlueScope Construction products for Indian market 2009
Vietnam steel project 4.5mtpa. 65% stake in the steel plant and 30% 2017
stake in Thach Khe Ore JSC that controls Iron ore
mining operations in Thach Khe Iron ore deposit
Millennium Steel expansion New 0.5mtpa blast furnace complex Oct. 2008
Source: Company data, Edelweiss research

11
Tata Steel

Valuations

We have used the sum-of-the-parts (SOTP) approach by valuing the three geographical operations
of Tata Steel (viz., Europe, India, and South East Asia) on FY09E EV/EBITDA multiple basis, thus
taking into account the different sets of characteristics, risks, and growth opportunities associated
with each of them. To arrive at suitable EV/EBITDA multiples for these geographical segments we
have adopted the following approach:

♦ Select a set of peer companies for each segment.

♦ Rank all the companies, including the corresponding segment of Tata Steel. For this we believe
following to be valuation drivers:

• Scale: Measured by revenue.

• Profitability: Measured by EBITDA margin.

• Growth: Measured by EBITDA growth over three year period up to CY10E

• Return on equity.

Valuing Corus with respect to European peers

For comparison, we have considered select European and Russian players such as Arcelor Mittal,
Severstal, and Voestalpine MMK. We have ranked all the companies on the above valuation
parameters viz., revenue, EBITDA margin, EBITDA growth, and RoE. Our analysis ranks Corus fifth
among the peer group of 10 companies. In spite of this mid-point rank, we are conservatively
ascribing an EV/EBITDA of 5.0x for FY09E for Corus, which is at a ~10% discount to the average
multiple of 5.5 FY09E (Table 12). Considering Corus’s scale and premium product range, one could
potentially argue for removing the discount but we have chosen to be conservative. Later in this
section we have provided a sensitivity of the fair value per share of Tata Steel across various FY09E
EV/EBITDA multiples for Corus.

Table 12: Comparative valuations for Corus

Valuation parameters Points
Mkt cap FY09E Rev FY09E EBITDA EBITDA growth FY09E EBITDA EBITDA Total EV/EBITDA
Companies (USD mn) USD (mn) margin (%) CAGR CY07-10E RoE(%) Revenue margin growth RoE points Rank FY09*

Voestalpine 11,224 15,705 18.7 19.5 25.4 7 3 9 8 27 1 6.2

NLMK 23,074 8,833 42.4 10.7 24.9 2 10 8 7 27 1 6.0
Evraz Group 27,684 13,426 33.8 (2.8) 31.3 5 9 1 10 25 3 6.5
MMK 14,991 9,165 28.6 1.7 27.7 3 8 5 9 25 3 5.5
ArcelorMittal 103,241 105,709 19.2 1.4 18.8 10 4 4 4 22 5 6.5
Severstal 22,724 17,433 27.1 2.9 15.8 8 7 6 1 22 5 4.8
Corus NA 24,466 11.7 22.7 16.0 9 1 10 2 22 5
Rautaruukki 5,899 6,285 21.0 6.2 24.5 1 5 7 6 19 8 4.7
Ssab Svenskt 8,222 10,072 24.7 (1.8) 23.2 4 6 3 5 18 9 6.1
Salzgitter 8,984 15,423 13.0 (2.7) 17.6 6 2 2 3 13 10 3.1
Average ex-Corus 5.5
Source: Bloomberg estimates, Edelweiss research Note: * FY09E is taken as a proxy for CY08E

12
Tata Steel

Valuing Tata Steel India with respect to regional peers

For Tata Steel India, we have considered regional peers such as JFE, Nippon, and POSCO from Far-
East and Chinese players such as Angang and Baoshan. We have ranked all the companies on the
above four parameters. Tata Steel India stands second in our ranking between two Chinese
players—Angang Steel and Wuhan Steel—which are trading at FY09E of 11.5x and 12.0x,
respectively (Table 13).

Table 13: Comparative valuations for Tata Steel

Valuation parameters Points
Mkt cap FY09E Rev FY09E EBITDA EBITDA growth FY09E EBITDA EBITDA Total EV/EBITDA
Companies (USD mn) USD (mn) margin (%) CAGR CY07-10E RoE(%) Revenue margin growth RoE points Rank FY09*
Angang Steel 28,336 10,248 26.6 10.9 22.0 3 8 8 7 26 1 11.5
Sumitomo Metal Ind. 22,066 15,345 24.1 8.6 22.1 4 6 6 8 24 2 7.9
Tata Steel 19,070 6,176 45.9 19.2 17.4 1 9 9 5 24 2
Wuhan Iron & Steel 21,133 8,179 22.9 9.2 26.4 2 5 7 9 23 4 12.0
JFE Holdings Inc 30,765 30,845 22.4 6.0 19.7 7 4 4 6 21 5 6.0
POSCO 53,526 32,492 25.7 (2.1) 16.1 8 7 1 2 18 6 6.5
Nippon Steel 41,670 41,994 18.1 5.5 17.3 9 2 3 3 17 7 7.2
Baoshan Iron & Steel 41,800 27,264 20.5 4.3 17.3 6 3 2 4 15 8 8.1
Kobe Steel Ltd. 10,031 18,619 14.6 5.9 15.3 5 1 5 1 12 9 6.1
Average ex-Tata 8.2
Source: Bloomberg estimates, Edelweiss research Note: * FY09E is taken as a proxy for CY08E

Tata Steel India’s No. 2 rank is due to its high EBITDA margin (~44%) and strong profit growth going
forward, even though it loses out on the scale parameter. In spite of this, we would like to be
conservative and choose to value Tata Steel India at EV/EBITDA multiple of 8.5, close to the average
EV/EBITDA of 8.2x for the peer group. It may be mentioned that players ranked 1 and 4 have a
much higher EV/EBITDA of 11.5x and 12.0x, respectively.

Valuing South East Asian operations at discount to Tata Steel India

We value South East Asian operations on EV/EBITDA of 4.2x (a 50% discount to the multiple for Tata
Steel India). These operations are low on scale, have no raw material security, and manufacture
longs (having less realization than flats).

13
Tata Steel

Our SOTP valuation gives a fair value of INR 1,219/share

Table 14 sets out the valuation details of Tata Steel.

Table 14: SOTP valuation

EV/EBITDA valuation for consolidated Tata Steel
Corus FY09E EBITDA USD mn 2,771
EV/EBITDA multiple x 5.0
Corus EV USD mn 13,949
Tata Steel India FY09E EBITDA USD mn 2,836
EV/EBITDA multiple x 8.5
Tata Steel India EV USD mn 24,039
Other sub FY09E EBITDA USD mn 189
EV/EBITDA multiple x 4.2
Other sub EV USD mn 801
Total EV USD mn 38,789
Net debt USD mn 14,563
Market cap USD mn 24,225
Market cap INR mn 944,784
No. of shares mn 852
Base price per share INR 1,108
Add : value of new projects/initiatives INR 111
Fair value per share INR 1,219
Current market price 935
Upside % 30.4
Source: Edelweiss research

We estimate the total EV at USD 38.8 bn and after deducting net debt of USD 14.6 bn we arrive
at equity valuation of USD 24.2 bn. We estimate the present fully diluted number of shares at
852 mn after taking into account all the current issuances including rights equity, CCPS
(cumulative convertible preference shares), and CARS (foreign currency convertible alternative
reference securities). The CARS being non-voting we have attributed a 75% equivalence factor
to them while adding to the voting shares. The base price per share works out to INR 1,108 per
share. We estimate fair value at 10% higher after considering the following:

• Asset value of the mines in Ivory Coast and Mozambique.

• Present value of the proposed expansion projects at Jamshedpur, Orissa, Chattisgarh,

and Jharkhand.

Sensitivity analysis of fair value

We have done sensitivity analysis on the fair value on two counts:

• Range of EV/EBITDA multiples for Tata Steel India and Corus.

• Different scenarios for increase/decrease in selling prices and raw material prices over
base case.

Sensitivity on multiples

We have done sensitivity analysis on EV/EBITDA multiple ranges covering most of the
companies in the European sector (for Corus) and Asian sector (for Tata Steel India). As set out
in Table 15, for Corus, the range is between Severstal (4.8x in CY08) and Arcelor Mittal (6.5x in
CY08) and for Tata Steel India, we have a range between POSCO (6.5x in CY08) and Wuhan
Steel (12.0x in CY08).

14
Tata Steel

Even if one discounts Corus further and considers an EV/EBITDA multiple of 4.5, the fair value
of share is still above INR 1,000/share. Post even partial raw material security for Corus in the
future, we believe Corus’s operations should be valued at forward EV/EBITDA of 5.5x; still at a
discount to Arcelor Mittal but implying a further upside to our fair price.

Table 15: Sensitivity analysis at various multiples for Corus and Tata Steel India
EV/EBITDA multiple range for Corus
INR/share Severstal Arcelor Mittal

EV/EBITDA Multiple range

1,219 4.0 4.5 5.0 5.5 6.0 6.5
POSCO 6.5 780 854 924 994 1,064 1,133

for Tata Steel India

7.5 927 1,002 1,072 1,141 1,211 1,281
8.5 1,075 1,149 1,219 1,289 1,359 1,428
9.5 1,222 1,297 1,367 1,436 1,506 1,576
10.5 1,370 1,444 1,514 1,584 1,653 1,723
Angang 11.5 1,517 1,592 1,661 1,731 1,801 1,871
Wuhan 12.5 1,665 1,739 1,809 1,879 1,948 2,018
Source: Edelweiss research

With the 1.8 mtpa expansion in Jamshedpur on track, we expect an improvement in Tata Steel
India’s operational scale through to FY10E. Coupled with high, sustained level of raw material
security in India and considering its No. 2 rank among its peers, one can justify a higher multiple
for Tata Steel India compared to our assumption which would imply an upside to our fair price.

Overall, we believe our multiples are on the conservative side and hence, there may be upside
from a possible re-rating (albeit a moderate one if it does happen) going forward.

Sensitivity on steel and raw material prices for Corus

We have set out the sensitivity of steel and raw material prices (iron ore and coking coal) to our
assumptions for Corus in FY09 (Table 16). The valuation is more sensitive to the changes in
steel prices than prices of raw materials due to higher proportion of premium products which
are affected the most either way.

Table 16: Steel and raw material price sensitivity

Steel price change (%)
INR/share 1,219 -5% -3% 0% 3% 5%
Raw matl. price

-10% 936 1,133 1,347 1,578 1,828

-5% 872 1,070 1,283 1,514 1,764
change (%)

0% 808 1,006 1,219 1,450 1,700

5% 745 942 1,155 1,386 1,636
10% 681 878 1,091 1,322 1,572
Source: Edelweiss research

For Corus, raw material cost is about 60% of the revenue hence the effect of raw material cost
changes is a bit less. With prices looking strong due to steady demand in Europe and iron ore
and coking coal price hikes factored in our model, we are confident of our base case valuation.

15
Tata Steel

Key Risks

♦ Raw material security: Post Corus acquisition, the raw material self sufficiency of Tata Steel
has dropped to 20% (earlier 100%) for iron ore and 15% (earlier 70%) for coking coal. This
reduced raw material security exposes the consolidated entity to margin decline in the event it is
unable to effect adequate price hikes.

♦ Steel demand in Europe may slow down: We expect Corus to benefit from higher price
realization owing to stable demand in Europe in the medium term. However, if the same slows
down and prices start moderating earlier than anticipated, there is a significant risk of margins
taking a hit since over 60% of Tata Steel’s volumes are from European operations.

♦ Extent of synergies realized through Corus acquisition: We believe the scope of synergies
with Corus is significant. These are expected to bring in benefits of USD 450 mn by reducing
cost at Corus on one hand and enriching Tata Steel’s product portfolio on the other, besides
providing benefits due to scale and tax savings. It will be crucial to see the quantum and timing
of these benefits, although we are confident of a positive outcome, given the management’s
intentions and abilities.

16
Tata Steel

Company Description

Established 100 years ago in 1907, Tata Steel is Asia’s first and India’s largest private sector steel
company. With the take over of Corus Steel, Tata Steel is now the sixth largest steel company in the
world with presence in India, South East Asia, UK, and continental Europe. The flagship company of
the Tata Group, Tata Steel India’s operations are amongst the lowest cost producers of steel in the
world and for two consecutive years has been ranked as the world’s ‘Best Steel Maker’ by World
Steel Dynamics. Tata Steel has a state-of-the-art ~5 mtpa steel making facility at Jamshedpur in
Jharkhand. Including Corus, the total consolidated capacity is now ~28 mtpa and there are ~82,700
employees across four continents. Tata Steel’s products are targeted at the quality conscious auto
sector and the burgeoning construction industry. With wire manufacturing facilities in India, Sri Lanka,
and Thailand, the company plans to emerge as a major global player in the wire business.

Acquisition of Corus has added a new dimension to Tata Steel and propelled it from a domestic
player into the league of truly global steel companies such as Arcelor Mittal, POSCO, and Nippon
Steel. Corus was formed in October 1999 by the merger of British Steel Plc and Koninklijke
Hoogovens NV and in April 2007 became a subsidiary of Tata Steel. It is Europe’s second largest
steel producer with revenues of USD 17.9 bn and crude steel production of 18.3 mn tones in 2006,
primarily in the UK and the Netherlands. Corus comprises three divisions—Strip Products, Long
Products, and Distribution & Building Systems—and has a global network of sales offices and
service centers.

Table 17: Corus acquisition financing details

Acquisition consideration USD 13,600 mn
Acquisition financing
Entity Instrument Amt (USD mn) Status
Tata Steel India Pref allotment to promoters 600 Completed
Internal accruals 700 - do -
CARS (non-voting shares) 900 - do -
Rights issue - straight equity 900 - do -
Rights issue - CCPS 1,400 - do -
Foreign offering 1,050 Proposed
Debt 1,650 Completed
Total 7,200
Tata Steel UK Debt 6,400 Completed
Total 13,600
Source: Company data, Edelweiss research

Manufacturing facilities

Corus has manufacturing operations in several countries with major plants located in the UK, The
Netherlands, Germany, France, Norway, and Belgium. The company produces carbon steel by the
basic oxygen (BOF) steel making method at four integrated steelworks at Port Talbot, Scunthorpe,
and Teesside in the UK and at IJmuiden in The Netherlands. Engineering steels are produced at
Rotherham, UK, using the electric arc furnace (EAF) method. The IJmuiden plant is Corus’s largest
and one of Europe’s most efficient plants (Table 18).

17
Tata Steel

Table 18: Corus-Production facilities, output and utilization (CY06)

Production Actual % of
Major production facilities CY06 (mn tonnes) capacity output capacity
Port Talbot Steelworks, West Glamorgan, UK 4.7 4.0 94
Scunthorpe Steelworks, South Humberside, UK 4.5 4.1 91
Teesside Steelworks, Redcar, Cleveland, UK 3.9 3.1 79
Rotherham Steelworks, South Yorkshire, UK 1.3 0.9 69
IJmuiden Steelworks, Netherlands* 6.8 6.2 91
Total 21.2 18.3 86
Source: Company data
Note: *IJmuiden Steelworks is in the process of increasing steel-making capacity to 7.5mtpa by 2010

Divisions of Corus

Corus is organized broadly into three main divisions, viz. strip products, long products, and
distribution & building systems (Table 19). The strip products division manufactures hot rolled, cold
rolled and metallic-coated steels for many industries. The division’s packaging unit supplies light
gauge steel for packaging and non-packaging applications. In CY06, the strip products division
contributed 48% to revenues and 45% to the sales volume. It also contributed 73% to the EBITDA
and enjoyed a comparatively high EBITDA margin of ~10%.

The long products division comprises the manufacture of plates, sections, wire rods, precision
components, engineering and semi-finished steel. It caters to the construction and industrial, aviation,
shipping, mining, and railway industries. In CY06, the division contributed 24% to revenues and 29%
to the sales volume. It contributed 14% to the EBITDA and had an average EBITDA margin of ~4%.

The distribution and building systems division covers service centers, stockholding and further
materials processing including building products. It also provides a wide range of consultancy
services from iron ore mining through to the marketing of finished products. In CY06, the division
contributed 28% to revenues and 26% to the sales volume. It contributed 14% to the EBITDA and
had an average EBITDA margin of ~3%.

Table 19: Divisional performance of Corus in CY06

Parameters CY06 Units Strip products division Long products division Dist. & bldg systems division
Gross shipments kt 11,386 7,281 6,612
Gross revenue GBP mn 5,366 2,698 3,115
Realization per tonne GBP 471 371 471
EBITDA GBP mn 530 102 99
EBITDA margin % 9.9 3.8 3.2
Product portfolio - HRC, CRC, metallic coated steel - plates, sections, wire rod - service centres, stockholding and
and semi-finished steel further materials processing including
building products

- light gauge steel for packaging
- hot finished and cold formed
steel tubular products
- colored pre-finished steels
- special strip channels
- specialized steel for white goods
Source: Company data
- engineering steel products - supply chain service business,
- rail products - consultany services from iron ore
mining through to the marketing of
finished products
- precision strip products
- hot-rolled special shaped
steel

18
Tata Steel

Industry Overview

Steel prices expected to rise on back of higher raw material prices

In CY07, prices of steel making raw materials i.e., iron ore and coking coal, have continued to
rise. On one hand, demand continues to grow, on the other, supply is restrained due to
infrastructure issues, government regulations, and port congestion. So far, until November 2007,
world crude steel production has gone up by 7.7% (Table 20).

Table 20: Steel consumption continues to grow, especially in Asia

Region (In '000 tonnes) 11 months CY07 11 months CY06 % increase
EU-27 193,314 190,358 1.6
Other Europe 27,864 25,581 8.9
CIS 113,272 108,915 4.0
NAFTA 121,619 121,871 -0.2
Latin America 43,897 41,493 5.8
Africa 16,932 16,781 0.9
Middle East 14,363 13,534 6.1
China 447,832 383,615 16.7
India 48,356 45,074 7.3
Other Asia 175,424 168,788 3.9
Oceania 8,043 7,968 0.9
Total World 1,210,916 1,123,978 7.7
Source: IISI

With global demand estimated to grow at 6.8% Y-o-Y in both CY07 and CY08 and steel
makers not willing to take any margin squeeze, we expect global prices will be negotiated at
higher rates for CY08. Additionally, we have seen signs of recovery in the US market with
producers attempting (and succeeding) to effect price hikes.

Our FY09 iron ore and coking coal cost estimates are up 35% and 15% Y-o-Y

Demand for steel making raw material is buoyant. On the supply side, there is no improvement
on the iron ore front and infrastructure bottlenecks continue to stymie even the existing
capacities in Australia and Brazil.

Chart 11: Iron ore and coking coal expected to remain firm through to CY10

170
Iron ore
Coking coal (Hard)
146

122
(USD/tonne)

Up 25%
in FY09E
Moderation not 98
expected until FY11E
Up 35% in FY09E
and 10% in FY10E
74

50
1Q 2006
2Q 2006
3Q 2006
4Q 2006
1Q 2007
2Q 2007
3Q 2007
4Q 2007
1Q 2008
2Q 2008
3Q 2008
4Q 2008
1Q 2009
2Q 2009
3Q 2009
4Q 2009
1Q 2010
2Q 2010
3Q 2010
4Q 2010

Source: Edelweiss research

19
Tata Steel

We have increased our cost estimates for Corus for iron ore by 35% to USD 107.7/tonne from
FY09 and further up 10% to USD 118.5/tonne from FY10 (Chart 11).

On the coking coal front, China’s return to a net importer position in coal has tightened the
global market considerably with focus shifting to Indonesia and Australia. A combination of
maintenance expansion work, shortage of rail capacity, and port congestion continues to
constrain Australian coal expansion. Freight rates are also at an all time high with latest shipping
rates from Australia to India reported to be up 50% to USD 60/tonne as compared to July.

We have increased our estimates for hard coking coal costs for Corus upwards by 25% to USD
159/tonne from FY09. We expect coking coal prices to be flat in FY10E .

European sheet prices continue to hold firm

European steel prices have been continuously rising this year. Till date, European prices have
gone up by 10% as compared to CY06 average. We expect the growth momentum to sustain
based on stable demand in Europe (Table 21).

Table 21: Steel prices have gone up through out this year
USD/tonne CY06 Q1CY07 Q2CY07 Q-o-Q chg (%) Q3CY07 Q-o-Q chg (%) Q4CY07 Q-o-Q chg (%)
HRC 584 608 661 9.0 682 3.0 695 2.0
CRC 707 716 753 5.0 771 2.0 806 5.0
HDG 811 872 910 4.0 909 0.0 828 (9.0)
Average 701 732 775 6.0 787 2.0 776 (1.0)
Source: CRU

Recently, at an IISI annual conference, Germany's large steel companies indicated that
increased input prices (including iron ore, logistics, and energy costs) will translate to an
increase in steel prices by USD 60-100/tonne next year.

20
Tata Steel

Financial Outlook

Consolidated EBITDA expected to cross INR 200 bn by FY09E

Global steel prices have generally remained at an all time high for CY07. We expect European
HRC prices to go up by USD 80-110/tonne on an average next year. Asia, with is strong
consumption growth, is also expected to witness price hikes next year. Recently, SAIL has
announced that it expects steel prices to go up by USD 25-50/tonne in early CY08. We expect
this to be the likely scenario since steel makers are not willing to settle for any margin squeeze
due to high raw material prices in the face of firm steel demand.

Table 22: Key assumptions

Units FY07 FY08E FY09E FY10E
Tata Steel
Crude steel capacity mn tonnes 4.8 4.8 6.6 6.6
Utilization % 102.5 108.6 93.1 101.6
Sales volume mn tonnes 4.9 5.2 6.2 6.7
Average realization USD/tonne 787 929 1004 1030
Average cost of production USD/tonne 474 527 543 567
EBITDA USD/tonne 313 402 461 463

Corus
Crude steel capacity mn tonnes 21.2 21.5 21.8 21.8
Utilization % 88.5 95.2 95.7 95.7
Sales volume mn tonnes 18.8 20.5 20.9 20.9
Average realization USD/tonne 854 981 1060 1074
Average cost of production USD/tonne 795 878 940 960
EBITDA USD/tonne 59 103 120 114

South East Asia

Crude steel capacity mn tonnes 1.7 1.7 2.2 2.2
Rolling Capacity mn tonnes 3.7 4.0 4.1 4.1
Utilization % 98.9 108.0 119.2 119.2
Sales volume mn tonnes 3.6 4.3 4.9 4.9
Average realization USD/tonne 466 566 596 618
Average cost of production USD/tonne 437 524 558 578
EBITDA USD/tonne 29 42 39 40
Source: Edelweiss research

Based on the expected increase in realizations and the proposed volume expansions, we
expect FY08E consolidated EBITDA to reach INR 186 bn over revenues of INR 1,192 bn (Table
23).

Table 23: Consolidated EBITDA likely to cross INR 200bn by FY09E

Y-o-Y Y-o-Y Y-o-Y

FY07E FY08E growth (%) FY09E growth (%) FY10E growth (%)
Revenue (INR mn) 1,065,179 1,191,923 11.9 1,309,622 9.9 1,320,137 0.8
EBITDA (INR mn) 130,971 185,844 41.9 226,018 21.6 225,368 (0.3)
EBITDA margin (%) 12.3 15.6 17.3 17.1
PAT (INR mn) 60,401 95,712 58.5 126,394 32.1 116,698 (7.7)
PAT margin (%) 5.7 8.0 9.7 8.8
Source: Edelweiss research

21
Tata Steel

In FY09E, we expect a further growth of 22% in EBITDA with 10% growth in revenue. This is
due to favorable steel prices, increased shipments from more profitable Asian operations, and
synergy benefits between Tata Steel and Corus of USD 40 mn. In FY10E, we expect a marginal
decline in revenue and EBITDA since we expect a slight moderation in steel prices with raw
material prices holding firm.

Tata Steel standalone EBITDA margin likely to average 44% for next three years

We expect the current 1.8 mtpa expansion programme at Tata Steel to enhance its profitability
even more in the next two years. With steel prices expected to remain high, increased focus on
value-added products and sufficient raw material security for its Indian operations, we believe
that further growth in EBITDA margin is in store.

Table 24: Tata Steel India-EBITDA margin expected at 45% on average for the coming two years

Y-o-Y Y-o-Y Y-o-Y

FY07 FY08E growth (%) FY09E growth (%) FY10E growth (%)
Revenue (INR mn) 175,520 195,451 11.4 240,852 23.2 262,571 9.0
EBITDA (INR mn) 69,733 84,542 21.2 110,591 30.8 118,033 6.7
EBITDA margin (%) 39.7 43.3 45.9 0.0 45.0 0.0
PAT (INR mn) 42,222 49,635 17.6 65,660 32.3 70,029 6.7
PAT margin (%) 24.1 25.4 27.3 26.7
Source: Edelweiss research

For the current fiscal year, we expect standalone EBITDA to be at INR 85 bn over revenue of
INR 195 bn, resulting in a margin of 43%. We expect PAT at INR 50 bn implying a net margin of
25% (Table 24). For H1FY08, the standalone operations reported revenue of INR 89 bn and
PAT of INR 24 bn, i.e., a margin of 26%. For the next two years on the back of volume-based
growth in premium products, we expect EBITDA margin to remain within the 45-46% range.

Corus: EBITDA margin expected to go up to 11% in FY09E

Corus is very critical for Tata Steel’s performance due to its scale and product range (higher
price realization). We believe Tata Steel’s first priority will be to secure the raw material for Corus.
The recent strategic investments in Mozambique and Ivory Coast for coking coal and iron ore
assets, respectively, are steps in this direction.

Table 25: Corus-EBITDA margin likely to remain between 10% and 11% through to FY10E

Y-o-Y Y-o-Y Y-o-Y

FY07E FY08E growth (%) FY09E growth (%) FY10E growth (%)
Revenue (INR mn) 813,046 898,678 10.5 955,946 6.4 943,614 (1.3)
EBITDA (INR mn) 56,470 94,003 66.5 108,057 15.0 99,912 (7.5)
EBITDA margin (%) 6.9 10.5 11.3 10.6
PAT (INR mn) 18,628 43,036 131.0 57,803 34.3 43,911 (24.0)
PAT margin (%) 2.3 4.8 6.0 4.7
Source: Edelweiss research

We expect EBITDA margin to remain in the 10-11% range for the next two years led by a
combination of increase in blended realizations (average 15% in FY08E and average 8% in
FY09E), higher capacity utilization, and improved productivity. This is also in line with the
estimated EBITDA margin for Corus for Q2FY08 and management’s guidance that margins will
be maintained at Corus. In FY08E and FY09E, we expect EBITDA of INR 94 bn and INR 108 bn
over revenue of INR 899 bn and INR 956 bn, respectively (Table 25).

22
Tata Steel

South-East Asia: Margin expected to remain stable over the next two years

We are bullish on the steel consumption growth in South East Asia in the next few years. While
price hikes are expected to be relatively modest (due to lower margin longs); some amount of
volume growth and excellent distribution network is expected to maintain Tata Steel’s South
East Asian operations’ margins stable between 6% and 7% over the next two years (Table 26).

Table 26: South East Asia-EBITDA margin to remain between 6% and 7% through to FY10E

Y-o-Y Y-o-Y Y-o-Y

FY07 FY08E growth (%) FY09E growth (%) FY10E growth (%)
Revenue (INR mn) 76,613 97,794 27.6 112,824 15.4 113,952 1.0
EBITDA (INR mn) 4,769 7,299 53.1 7,371 1.0 7,423 0.7
EBITDA margin (%) 6.2 7.5 6.5 6.5
PAT (INR mn) (449) 3,042 N/A 2,931 (3.6) 2,758 (5.9)
PAT margin (%) (0.6) 3.1 2.6 2.4
Source: Edelweiss research

For the current year, we expect an EBITDA margin of 7.5% over revenue of INR 98 bn. We
believe the underlying robust demand will sustain through to FY10E and hence, we expect
EBITDA margin to remain between and 6% and 7% over revenue of INR 112-113 bn in FY09E
and FY10E.

Tax benefits arising out of USD 2.2 bn tax losses in Corus

We understand from management that unabsorbed tax losses of USD 2.2 bn at Corus are
available for set off against future profits. As a result, we are estimating tax rate on consolidated
basis at 21% for FY08E and 22% for FY09E.

23
Tata Steel

Financial Snapshots (Consolidated)

Income statement (INR mn)

Year to March FY06* FY07* FY08E FY09E FY10E
Net sales & operating income 203,221 252,133 1,191,923 1,309,622 1,320,137
Accretion to stock (470) (5,402) - - -
Raw material costs 24,954 91,714 654,540 732,553 741,385
Purchase of goods 42,104 - - - -
Employee expenses 16,725 18,850 109,111 108,161 106,339
Freight and handling expenses 12,254 15,084 146,116 140,799 139,526
Other expenses 43,434 57,387 96,312 103,664 110,373
Total operating expenses 139,777 177,632 1,006,079 1,083,604 1,094,769
EBITDA 63,444 74,502 185,844 226,018 225,368
Depreciation and amortisation 8,604 10,110 37,047 38,603 40,336
EBIT 54,840 64,392 148,797 187,415 185,032
Interest expenses 1,616 4,112 37,979 35,669 32,098
Other income 2,467 4,381 10,240 10,842 11,580
Extraordinary items (542) (1,530) (1,141) (741) (741)
Profit before tax 55,150 63,130 119,918 161,847 163,772
Provision for tax 17,939 21,474 25,874 37,099 48,695
Profit before minority interest 37,211 41,656 94,044 124,747 115,077
Minority interest 186 675 1,347 1,578 1,647
Share of profit of associates 322 792 3,014 3,225 3,267
Profit after tax 37,346 41,773 95,712 126,394 116,698
Shares outstanding (mn) 553 580 822 893 893
Dividend per share (INR) 13.0 16.3 13.0 10.0 10.0
Dividend payout (%) 22.0 22.6 11.2 7.1 7.6

Common size metrics- as % of net revenues

Year to March FY06* FY07* FY08E FY09E FY10E
Operating expenses 68.8 70.5 84.4 82.7 82.9
Depreciation 4.2 4.0 3.1 2.9 3.1
Interest expenditure 0.8 1.6 3.2 2.7 2.4
EBITDA margins 31.2 29.5 15.6 17.3 17.1
Net profit margins 18.3 16.5 7.9 9.5 8.7

Growth metrics (%)

Year to March FY06* FY07* FY08E FY09E FY10E
Revenues 27.0 24.1 372.7 9.9 0.8
EBITDA 2.3 17.4 149.5 21.6 (0.3)
PBT 1.3 14.5 90.0 35.0 1.2
Net profit 3.6 11.9 129.1 32.1 (7.7)
EPS 3.5 6.6 61.6 21.6 (7.7)
* without Corus

24
Tata Steel

Balance sheet (INR mn)

As on 31st March FY06* FY07* FY08E FY09E FY10E
Equity capital 5,530 5,798 8,221 8,926 8,926
Preference shares 1,645 9,100 9,100 0
Reserves & surplus 97,288 138,953 261,828 337,368 399,787
Shareholders funds 102,818 146,397 279,149 355,394 408,713
Secured loans 25,034 49,612 444,806 398,536 398,287
Unsecured loans 8,740 199,643 212,761 212,284 212,045
Minority interest 1,236 5,984 6,823 7,915 9,090
Deferred Income 0 5,363 5,168 5,070
Deferred tax liability 9,922 7,859 7,569 9,335 11,242
Prov. for VRS 14,026 11,183 27,532 26,155 25,095
Miscellaneous expenditure 2,560 0 0 0 0
Sources of funds 159,216 420,678 984,002 1,014,786 1,069,542
Gross block 179,881 234,102 950,623 978,491 981,544
Depreciation 71,058 91,896 588,965 609,400 640,170
Impairment 942 0 0 0 0
Net block 107,881 142,205 361,658 369,091 341,374
Total fixed assets 107,881 142,205 361,658 369,091 341,374
Investments 34,789 164,975 181,639 175,443 174,540
Goodwill 1,140 2,197 226,558 226,168 225,973
Loans and advances 11,382 13,492 137,302 149,170 149,922
Inventories 22,765 31,952 203,325 222,126 223,982
Sundry debtors 12,187 3,373 34,326 37,292 37,480
Cash and equivalents 7,768 108,880 65,660 76,524 76,892
Other current assets 4,980 26,745 28,452 29,213 29,774
Total current assets 59,081 184,441 469,064 514,325 518,050
Sundry creditors and others 32,925 17,916 172,137 186,464 166,440
Provisions 10,750 57,322 84,877 85,875 26,052
Total CL & provisions 43,675 73,140 254,916 270,241 190,395
Net current assets 15,406 111,301 214,148 244,084 327,655
Uses of funds 159,216 420,678 984,002 1,014,786 1,069,542
Book value per share (BV) (INR) 186 252 340 398 458

Cash flow statement (INR mn)

Year to March FY06* FY07* FY08E FY09E FY10E
Net profit 37,211 41,656 94,044 124,747 115,077
Depreciation 8,604 10,110 37,047 38,603 40,336
Working capital (+/-) post adjustments (8,459) 2,941 71,111 74,184 15,666
Operating cash flow 37,355 55,030 202,202 237,535 171,079
Proceeds from Issue of Equity 7 15,403 9,878 705 (9,100)
Increase/ Decrease (+/-) in borrowings 450 203,397 414,513 (45,850) 590
Decrease/Increase (+/-) in investments (8,446) (132,094) (241,025) 6,586 1,098
Dividend pay out including div tax (7,117) (7,168) (12,266) (10,245) (10,245)
Capex (19,348) (37,617) (416,522) (177,868) (153,054)
Financing cash flow (34,454) 41,921 (245,422) (226,671) (170,711)
Opening cash FY 4,866 11,929 108,880 65,660 76,524
Net increase / Decrease in cash 2,902 96,951 (43,220) 10,864 368
Closing cash FY 7,768 108,880 65,660 76,524 76,892
* without Corus

25
Tata Steel

Ratios
Year to March FY06* FY07* FY08E FY09E FY10E
ROE (%) 42.4 33.5 45.0 39.8 30.5
ROCE (%) 38.0 27.8 27.6 25.4 22.8
Current ratio 1.4 2.5 1.8 1.9 2.7
Debtors (days) 21.9 4.9 10.5 10.4 10.4
Fixed assets t/o (x) 1.9 1.8 3.3 3.5 3.9
Debt/ Equity 0.3 1.7 2.4 1.7 1.5

Valuations parameters
Year to March FY06* FY07* FY08E FY09E FY10E
EPS (INR) 67.6 72.0 116.4 141.6 130.7
Y-o-Y growth (%) 3.5 6.6 61.6 21.6 (7.7)
CEPS (INR) 82.9 89.3 159.5 183.0 174.1
P/E (x) 13.8 13.0 8.0 6.6 7.2
Price/BV(x) 5.0 3.7 2.8 2.3 2.0
Market cap/Sales (x) 2.5 2.1 0.6 0.6 0.6
EV/Sales (x) 2.7 2.7 1.1 1.0 1.0
EV/EBITDA (x) 8.6 9.2 7.3 6.1 6.1
* without Corus

26
 Tata Steel

Edelweiss Securities Limited, 14th Floor, Express Towers, Nariman Point, Mumbai – 400 021, Board: (91-22) 2286 4400, Email: research@edelcap.com
Naresh Kothari Co-Head Institutional Equities naresh.kothari@edelcap.com +91 22 2286 4246

Vikas Khemani Co-Head Institutional Equities vikas.khemani@edelcap.com +91 22 2286 4206

Shriram Iyer Head Research shriram.iyer@edelcap.com +91 22 2286 4256

Coverage group(s) of stocks by primary analyst(s): Metals & Mining:

Adhunik Metaliks, Bhushan Steel & Strips, Hindalco Industries, Hindustan Zinc, Jindal Stainless, Jindal Steel & Power, JSW Steel, Monnet Ispat and
Energy, National Aluminium Company, Sesa Goa, Steel Authority of India, Sterlite Industries (India), Tata Steel, Usha Martin

Tata Steel Recent Research

1000 Date Company Title Price (INR) Recos

860 10-Dec-07 Sesa Goa Structural change 3,593 Buy

underway;
720
(INR)

Company Update
580 29-Nov-07 Adhunik Riches from the earth… 167 Buy
Metaliks and above;
440 Company Update
300 07-Nov-07Monnet Ispat IPP financial closure in 395 Buy
Dec-06
Jan-07
Feb-07
Mar-07
Apr-07
May-07
Jun-07
Jul-07
Aug-07
Sep-07
Oct-07
Nov-07
Dec-07

and Energy sight; Company Update

02-Nov-07 Usha On track 89 Buy
Martin Result Update

Distribution of Ratings / Market Cap Rating Interpretation

Edelweiss Research Coverage Universe
Rating Expected to
Buy Accumulate Reduce Sell Total
Buy appreciate more than 20% over a 12-month period
Rating Distribution* 107 45 18 3 193
Accumulate appreciate up to 20% over a 12-month period
* 13 stocks under review / 7 rating withheld
Reduce depreciate up to 10% over a 12-month period
> 50bn Between 10bn and 50 bn < 10bn

Market Cap (INR) 104 69 20 Sell depreciate more than 10% over a 12-month period

This document has been prepared by Edelweiss Securities Limited (Edelweiss). Edelweiss and its holding company and associate companies are a full service, integrated
investment banking, portfolio management and brokerage group. Our research analysts and sales persons provide important input into our investment banking activities. This
document does not constitute an offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction. The information contained
herein is from publicly available data or other sources believed to be reliable, but we do not represent that it is accurate or complete and it should not be relied on as such.
Edelweiss or any of its affiliates shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in
this report. This document is provided for assistance only and is not intended to be and must not alone be taken as the basis for an investment decision. The user assumes the
entire risk of any use made of this information. Each recipient of this document should make such investigation as it deems necessary to arrive at an independent evaluation of an
investment in the securities of companies referred to in this document (including the merits and risks involved), and should consult his own advisors to determine the merits and
risks of such investment. The investment discussed or views expressed may not be suitable for all investors. We and our affiliates, officers, directors, and employees may: (a) from
time to time, have long or short positions in, and buy or sell the securities thereof, of company (ies) mentioned herein or (b) be engaged in any other transaction involving such
securities and earn brokerage or other compensation or act as advisor or lender/borrower to such company (ies) or have other potential conflict of interest with respect to any
recommendation and related information and opinions. This information is strictly confidential and is being furnished to you solely for your information. This information should not be
reproduced or redistributed or passed on directly or indirectly in any form to any other person or published, copied, in whole or in part, for any purpose. This report is not directed or
intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution,
publication, availability or use would be contrary to law, regulation or which would subject Edelweiss and affiliates to any registration or licensing requirements within such
jurisdiction. The distribution of this document in certain jurisdictions may be restricted by law, and persons in whose possession this document comes, should inform themselves
about and observe, any such restrictions. The information given in this document is as of the date of this report and there can be no assurance that future results or events will be
consistent with this information. This information is subject to change without any prior notice. Edelweiss reserves the right to make modifications and alterations to this statement
as may be required from time to time. However, Edelweiss is under no obligation to update or keep the information current. Nevertheless, Edelweiss is committed to providing
independent and transparent recommendation to its client and would be happy to provide any information in response to specific client queries. Neither Edelweiss nor any of its
affiliates, directors, employees, agents or representatives shall be liable for any damages whether direct, indirect, special or consequential including lost revenue or lost profits that
may arise from or in connection with the use of the information. Past performance is not necessarily a guide to future performance. The disclosures of interest statements
incorporated in this document are provided solely to enhance the transparency and should not be treated as endorsement of the views expressed in the report. Edelweiss Securities
Limited generally prohibits its analysts, persons reporting to analysts and their family members from maintaining a financial interest in the securities or derivatives of any companies
that the analysts cover. The analyst for this report certifies that all of the views expressed in this report accurately reflect his or her personal views about the subject company or
companies and its or their securities, and no part of his or her compensation was, is or will be, directly or indirectly related to specific recommendations or views expressed in this
report. Analyst holding in the stock: no.

Copyright 2007 Edelweiss Research (Edelweiss Securities Ltd). All rights reserved

27 Edelweiss Research is also available on Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.
Edelweiss Research is also available on Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.