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Tata Steel: Hurt by the macro
Jan 28, 2009

Performance summary
  • Standalone topline declines by 3.5% YoY, mainly on account of lower realizations and volumes
  • Operating profits decline by 27.3% YoY, resulting into an EBITDA margin contraction of 10%.
  • Net profits (after extra ordinary income/ expenses) suffer a fall of 56.4% YoY, led by fall in operating margins as well as higher depreciation charges. PBT, which excludes the impact of forex related losses, comes in lower by 41.9% YoY.
  • Bottomline for the first nine month grows 7.5% YoY on the back of 27.6% growth in topline.


Standalone financial snapshot
(Rs m) 3QFY08 3QFY09 Change 9mFY08 9mFY09 Change
Steel sales (000' tonnes) 1,244 1,072 -13.8% 3,503 3,451 -1.5%
Net sales 49,739 48,021 -3.5% 139,566 178,153 27.6%
Expenditure 29,423 33,242 13.0% 83,113 101,323 21.9%
Operating profit (EBDITA) 20,316 14,780 -27.3% 56,453 76,830 36.1%
EBDITA margin (%) 40.8% 30.8% á 40.4% 43.1% á
Other income 471 85 -82.0% 2,361 2,616 10.8%
Interest (net) 3,427 3,482 1.6% 5,735 8,448 47.3%
Depreciation 2,092 2,513 20.1% 6,255 7,169 14.6%
Profit before tax 15,267 8,869 -41.9% 46,825 63,829 36.3%
Extraordinary income/(expense) 479 (1,268) -364.6% 5,413 (7,756) á
Tax 5,061 2,939 -41.9% 17,423 18,648 7.0%
Profit after tax/(loss) 10,686 4,662 -56.4% 34,815 37,425 7.5%
Net profit margin (%) 21.5% 9.7% á 24.9% 21.0% á
No. of shares (m) 730.8 609.2 á 609.2 730.8 á
Diluted earnings per share (Rs)* á á á á 67.7 á
Price to earnings ratio (x)* á á á á 2.6 á
( * on trailing twelve months earnings)

What has driven performance in 3QFY09?
  • The topline of the company declined by 3.5% YoY on account of lower realizations and volumes. Steel sales volumes declined by 13.8% YoY during the quarter mainly on account of slowdown in demand and shut down of mill for 17 days which caused lower production.

  • On the operating front, EBITDA margins declined by 10% on account of fall in operating profits. The operating expenses grew at 13% YoY during the quarter, led by higher raw material prices and staff costs. Raw material prices increased to 22.2% (as % sales) mainly on account of higher coking coal prices during the quarter.

    Cost break-upů
    (Rs m) 3QFY08 3QFY09 Change
    Raw materials 9,342 10,683 14.4%
    % sales 18.8% 22.2%  
    Staff cost 4,297 5,689 32.4%
    % sales 8.6% 11.8%  
    Freight and handling 2,984 2,622 -12.1%
    % sales 6.0% 5.5%  
    Purchase of power 2,395 2,635 10.0%
    % sales 4.8% 5.5%  
    Other expenses 10,406 11,613 11.6%
    % sales 20.9% 24.2%  

  • Net profits (after extra ordinary income/ expenses) fell by 56.4% YoY led by fall in operating profits and topline. Furthermore, higher depreciation charges and forex losses have adversely impacted the profits. Forex losses during the quarter stood at Rs 1.3 bn as against the profit of Rs 479 m in corresponding quarter last year. PBT, which excludes impact of forex related losses declined by 41.9% YoY during the quarter.

What to expect?
At the current price of Rs 180, the stock is trading at a P/BV multiple of 0.34x its standalone FY11 expected book value per share. The topline growth for the quarter was nearly in line with our estimates. However, bottomline growth has come in lower than our expectations. We would like to wait for one more quarter before we make changes to our assumptions. If at all we revise our numbers downwards, the difference to intrinsic value is not going to be very significant. Taking into account this observation and also the fact that the stock trades at a huge discount to its intrinsic value, we continue to remain positive from a medium term perspective.

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