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Centrum Broking
Tata Sponge (Buy)
CMP: ₹781.4
Target: ₹980
Tata Sponge’s Q3 performance was weak despite robust volume of 111 kt and EBITDA at ₹30.4 crore was down 37 per cent y-o-y led by lower spreads due to escalation in raw material costs. Raw material cost/t increased by 8.7 per cent q-o-q to ₹17,600/tonne and gross profit/t stood lower q-o-q at ₹5,923 (versus ₹7,078/tonne in Q2). Management indicated that high cost of iron ore and increased coal cost (impacted further by a weak rupee) kept gross margin under pressure.
We maintain our ‘Buy’ rating on Tata Sponge (TSIL) with a revised TP of ₹980 as we expect the Usha Martin (UML) acquisition by TSIL to be value accretive led by i) increase in capacity utilisation resulting in higher volumes; ii) material synergies at both UML and TSIL plants led by application of Tata’s best practices; iii) healthy balance sheet; and iv) long runway for organic growth in future at both plants.
Tata Sponge’s Q3 performance was subdued due to lower spreads, but the same is expected to improve going ahead and approval of higher production was heartening. The company is currently working on raising funds for the UML acquisition and remains on track to merge the steel business of UML with itself by FY19-end.
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