Centrum’s research report on Tata Sponge
We maintain our Hold rating on Tata Sponge (TSIL) with a revised TP of Rs1130 as we see valuations fair with historic high spreads having marginal downside risks and surplus cash on books expected to be deployed as CWIP in the steel plant capex over the next few years. Q4 earnings were very strong YoY led by better pricing and solid volumes. TSILs spreads in sponge iron business have continued to improve but sustenance of the same at current high levels for long periods of time is difficult and hence we continue to build our annual estimates well below the current run-rate.
We continue to value the company at 5x FY20E EV/EBITDA and value the surplus cash at 75% as this cash is expected to be deployed as CWIP for the steel plant over next few years. We revise our TP to Rs1130 and maintain Hold. Key downside risks are fall in sponge iron prices and higher coal costs while upside risks are higher volumes and better spread.
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