Tata Steel

TATA STEEL LIMITED

Prashant GalaHarshad Sampat

Tushar BirjePrathamesh Nerkar

Nishant Kolapkar

Introduction• A part of TATA conglomerate.• World’s 11th largest steel company. Annual capacity of 31m tonne.• India’s largest private sector measured by domestic production.• Important player in economic & industrial development of India.• Acquired European steel major CORUS in 2007.• A 100 year old org.

Overview of sales & profits

26%

27%

29%18%

IndiaUKEurope ex. UKRest of World

• Strong presence across the world.

• Net sales have grown by average annual rate of 16% over past 10 years

• Net profits have grown by average annual rate of 29% over past 10 years.

• Return on equity of 30% over past 10 years.

Certain Questions…..• Q.1 - What exactly the company does?• Q.2 - Is it a low risk business?• Q.3 - Is there a room for future growth?• Q.4 - Does the co. generate strong free cash flows?• Q.5 - Dividend History.• Q.6 - Is the business capital intensive ? • Q.7 - Is the mgmt known for its capital allocation skills & integrity ?• Q.8 - Is the management shareholding strong enough?• Q.9 - What has mgmt done with the free cash in the past?• Q.10 - Are management salaries too high ?

Intrinsic Value• Intrinsic value – True value of an asset. Not a Market value.

E.g. - Onion price went upto INR 50 but its real value was INR 10.

• Intrinsic value isn’t a definite figure but just a ‘calculated’ value.

• Figure changes as estimates of variable like future cash flows are revised (given that the futureis unknown).

NPV based on 10yr DCF• Formula – NPV = (CF/1+r) + (CF2/1+r^2)….. + (TCF/r-g * 1/1+r^n-1)where NPV – Net present value

CF – Cash flow.R – Discount rate.G – Growth rate assumption in perpetuity.TCF – Terminal year cash flow.N - No. of periods in the valuation model

including the terminal year.

We have assumed the following --- • Growth in cash flows of 8% (years 1- 5) and 5%

(years 6-10).• Average cost of capital – 15 % .• Expected growth rate after 10 yrs & till

perpetuity – 1%.(limited iron ore & coking coal can be mined)

NPV based on 10yr DCF contd..

• Based on these numbers and after reducing the net debt (debt minus cash), the present or discounted value of future cash flows for Tata Steel is coming at Rs 560 per share, which is also the stock’s intrinsic value using this method.

NPV based on 10yr DCF contd..

Rs 560/-

Dividend Discount Model (DDM)• Dividends are the cash flows that are

returned to the shareholders.• Formula for valuing a company with a

constantly growing dividend is --

We have assumed the following –• Discount rate of 15%.• Dividend growth rate of 12%.• Latest dividend of Rs 12 (2010 -2011)

Dividend Discount Model (DDM) contd.

• Based on the above assumptions the intrinsic value of Tata Steel based on DDM model is Rs 400/-

Rs 12/ 15% - 12% = Rs 400/-

Dividend Discount Model (DDM) contd.

Rs 400/-

Fair Value Range• Intrinsic Value as per NPV based on 10yr DCF – Rs

560 /-• Intrinsic Value as per DDM model – Rs 400/-

So which model should we consider ???For simplicity we use the avg. of both the models & apply margin of safety.

• Average of both the intrinsic value comes toRs 480/- ( 560 + 400 /2).

• We assume 25% margin of safety, which comes to (480 * 25/100 = 120).

• So Fair value after MOS =RS 360/-(480 - 120).

Fair Value Range

Recommendation• Fair value after margin of safety – Rs 360/-• Current market price – Rs 470/- (17th Feb 2012).• Market price > Fair Value, so value investor may

want to avoid the stock at CMP. • Note – Share price as of 2nd Jan 2012

was Rs 341/-