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TATA STEEL LIMITED

Prashant Gala Harshad Sampat Tushar Birje Prathamesh Nerkar Nishant Kolapkar

Introduction
A part of TATA conglomerate. Worlds 11th largest steel company. Annual capacity of 31m tonne. Indias 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


Strong presence across the world.
India 18% 26% UK Europe ex. UK Rest of 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.

29%

27%

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 isnt a definite figure but just a calculated value. Figure changes as estimates of variable like future cash flows are revised (given that the future is 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. NNo. of periods in the valuation model including the terminal year.

NPV based on 10yr DCF contd..


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 stocks intrinsic value using this method.

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 --

Dividend Discount Model (DDM) contd.


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/-

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.

Fair Value Range


Average of both the intrinsic value comes to Rs 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).

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/-