Worst is behind; upgrade to Buy with revised TP of INR540/share
We have upgraded Tata Steel to Buy (see our Alert of earlier today), with the upgrade premised on three key factors: (1) our overriding view that the worst is over for Corus and that each quarter at Corus should be incrementally better, following the record negative EBITDA of US$387mn in 1Q’FY10, (2) 132% CAGR in consolidated EPS over FY10-12E, and (3) what we see as attractive valuation – the stock currently trades at a FY11E EV/EBITDA of 4.9x, an 18% discount to the average valuation of its global peers.

Earnings turnaround at Corus – a compelling catalyst for investors
The tempest in the global steel industry – which has savaged profitability of almost all world steel majors – now appears to be in retreat. Worries over long-drawn earnings uncertainty at Corus have been a key stock overhang since late last year. Nascent recovery in steel consumption in Europe, a rising capacity utilization rate and a decline in coking coal prices should drive an EBITDA turnaround at Corus. We forecast Corus EBITDA to rise at a CAGR of 260% over FY10-12.

Contribution from high-margin Indian operations to increase
Tata Steel’s India operations (among the most competitive in the world) look set to benefit impressively from aggressive organic growth. EBITDA at Indian operations is likely to rise at 21% CAGR over our forecast period. Increasing production in India should result in Indian operations constituting an overwhelming 67% of consolidated EBITDA by FY12 from 46% in FY08 when Corus was acquired.

Raising TP to INR540/share; Upgrade to Buy
Our TP of INR540 is based on a SOTP valuation: Indian operations valued at FY11E EV/EBITDA of 6.4x, UK ops valued at FY11E EV/EBITDA of 5.1x, Asia ops valued at FY11E EV/EBITDA of 2x. Our TP translates into a blended FY11E EV/EBITDA multiple of 5.4x. Key risk: Delay in steel demand recovery.

To read full report see attachment: TATA STEEL

…fuelled by global equities’ rising growth premium, favourable demographics, diminished policy risks and equities’ under-owned status

This report launches PL’s equity strategy coverage of the Indian market. Our team’s coverage of the Indian market conjoins top-down with bottom-up dynamics. At the top-down level, our team’s expertise seeks to exploit the Indian market’s long-running dependence on global macro and market dynamics, especially over short time periods. Such analysis allows us to derive prospective Asia regional relative Indian market and Indian market relative sector performance return outlooks. Such cross-market dynamics are most prevalent for materials, energy, IT and, to a lesser degree, industrials and financial sector stocks. At the bottom-up level, our team draws on the PL equity research franchise’s strong ability to cover the Indian equity market at the sector and individual company levels.
In our view, the Indian equity market is one amongst very few markets around the world to look poised to advance on a long-term bull phase over the next several years. Such view is arrived at by drawing on the rich set of precedents of countries undergoing secular bull markets, dating back several decades.

India’s outlook is supported by a plethora of self-sustaining fundamental drivers, complemented by supportive technical/positioning dynamics. The set of fundamental drivers anchoring the outlook are discussed in a linear fashion in the succeeding pages, including demographics, a sound mediumand long-term earnings outlook, a vastly improved policy backdrop and India’s allure at a point in history where growth premium is bound to reset at higher levels. On the other hand, the foremost technical factor anchoring the outlook entails the vast under-owned status of Indian equities vis-à-vis global and resident Indian investors.

Our bullish medium- and long-term investment outlook on Indian equities is tempered by concerns over the short-term outlook facing global equities.

To read the full report see attachment: INDIA EQUITY STRATEGY