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Tisco: Melting demand

Jan 24, 2002

The impact of slowdown in the Indian and global economy is clearly reflected in Tisco's third quarter performance. Excess capacity and mounting inventory levels have depressed steel prices which had a significant impact on steel majors financial performance. Tisco has reported a 73% fall in net profits in 3QFY02 and a more than 70% fall in profits for the third consecutive quarter. Revenues too have remained flat in the December quarter.

(Rs m)3QFY013QFY02Change
Gross Sales 18,682 19,022 1.8%
Other Income 36 160 345.0%
Expenditure 14,501 15,893 9.6%
Operating Profit (EBDIT) 4,181 3,129 -25.2%
Operating Profit Margin (%)22.4%16.4%
Interest 993 967 -2.7%
Depreciation 1,291 1,358 5.2%
Profit before Tax1,933964-50.1%
Other Adjustments-527-5616.5%
Tax 130 57 -56.0%
Profit after Tax/(Loss) 1,276 346 -72.9%
Net profit margin (%)6.8%1.8%
No. of Shares (m) 368.0 368.0
Diluted Earnings per share*19.69.9
P/E (at current price) 10.1
*(annualised and before other adjsts.)

Tisco's operating margins failed to show signs of improvement in the third quarter. From 22% in 3QFY01, OPM declined by 590 basis points to 16%. However, on a QoQ basis, the company has seen a rise in OPM by 150 basis points. This could be on the back of improvement in product mix by increasing volumes of cold rolled and coated steels. The company is also focusing on branding of steel products and rural marketing.

Tata Steel's ongoing efforts to reduce cost has helped it in curtailing interest cost. The company has refinanced high cost debt of Rs 5 bn in the current quarter by exercising call option on the issue and has successfully raised fresh debt of Rs 2 bn at an average cost of 9.2%.

At the current market price of Rs 100, Tisco is trading at a P/E multiple of 10x 3QFY02 annualised earnings. Steel demand globally is unlikely to improve in the next two quarters and prices are likely to remain at lower levels. This would further impact the company's business in the coming quarters. However, Tisco's initiatives to foray into other international markets for exports and its strong brand could trim the drop in earnings.

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