Prabhudas Lilladher has maintained `Accumulate` on Tata Steel with a price target of Rs 417 as compared to current market price (CMP) Rs 391 in its report dated Nov. 12, 2012. The broking firm gave following investment rationale on the stock:
Earnings for the quarter were impacted by forex loss of Rs 1.8 billion (shown in other expenses) on MTM of forward covers on loans and absence of by-product sales (against Rs 1.86 billion QoQ). Hence, EBITDA fall short of our expectation at Rs 24.0 billion (PLe: Rs 28.6 billion), down 10% YoY (9% QoQ). Steel realizations dropped 3.7% QoQ/Rs 1,521 to Rs 39,121, marginally better than expectation of Rs 39,036. Thanks to higher than expected other income and lower tax rate, fall in PAT was restricted to 1% QoQ (10% YoY) at Rs 13.4 billion (PLe: Rs 15 billion).
Q3 earnings outlook muted for domestic operations due to softening in contract prices, maintained guidance of 1m tonne incremental volumes in domestic operations; majority to come in Q4, triennial valuation in European pension schemes completed with net deficit of GBP 500 million to be recovered over 15 years and management expects minimal cash outflows in these schemes during initial years.
Tata Steel reported Q2FY13 earnings below our expectation on account of higher than expected costs in domestic operations and weakness in European operations. We believe that current earnings in domestic operations don`t reflect the normalized earnings given the high cost in expanded capacity due to instabilization of facilities, elevated forex losses and absence of scale benefits. We maintain our `Accumulate` rating, underpinned by strong domestic operations and comfort on valuations.
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