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Tata Steel: Both Europe & India operations suffer - Views on News from Equitymaster
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Tata Steel: Both Europe & India operations suffer
Feb 10, 2015

Tata Steel has announced its December quarter (3QFY15) results. On a standalone and consolidated basis the company has reported 2.4% YoY and 8.4% YoY decline in topline respectively. In line with a fall in revenues, bottomline declined by 42.0% YoY (standalone) and 68.8% YoY (consolidated) respectively. Here is our analysis of the results.

Performance summary
  • Consolidated topline declines by 8.4% YoY. On a standalone basis too, revenues were down by 2.4% YoY due to weakening steel demand and surge in imports which led to softening of prices. The group deliveries stood at 6.3 million tons (MT) and 19.25 MT in 3QFY15 and 9MFY15 respectively.
  • Consolidated operating profit was down by 23.2% YoY while the operating margins decreased by nearly 180 bps. Profits were impacted due to mining bans which led to sourcing of key raw materials from outside.
  • On a consolidated basis, net profits declined by 68.8% YoY due to poor performance at the operating level. However, lower tax rates in India (investment allowance given for a project) cushioned profits to an extent.
  • The company incurred Rs 35.49 bn towards capex in 3QFY15.
  • The company sold its 5% stake in Carborough Downs JV for A$ 6.9 m in order to strengthen its balance sheet.

Financial Performance Snapshot
  Standalone results Consolidated results
(Rs m) 3QFY14  3QFY15 Change 3QFY14  3QFY15 Change
Net sales 101,434 98,968 -2.4% 367,358 336,332 -8.4%
Expenditure 72,075 79,169 9.8% 327,293 305,558 -6.6%
Operating profit (EBITDA) 29,359 19,799 -32.6% 40,065 30,774 -23.2%
EBDITA margin (%) 28.9% 20.0%   10.9% 9.1%  
Other income 2,648 1,083 -59.1% 181 1,191 557.3%
Interest (net) 4,529 4,624 2.1% 11,084 11,674 5.3%
Depreciation 4,565 4,573 0.2% 15,221 14,511 -4.7%
Profit before tax 22,913 11,685 -49.0% 13,942 5,780 -58.5%
Extraordinary income/(expense) 0 0 NA 4 - -100.0%
Tax 7,726 2,878 -62.7% 8,951 4,467 -50.1%
Profit after tax/(loss) 15,188 8,806 -42.0% 4,995 1,313 -73.7%
Minority interest 0 0 NA 27 156 470.4%
Share of profit of associates 0 0 NA 10 102 916.0%
PAT after minority and sh. of assoc. profit 15,188 8,806 -42.0% 5,032 1,571 -68.8%
Net profit margin (%) 15.0% 8.9%   1.4% 0.5%  
No. of shares (m)   971     971  
Basic & Diluted earnings per share (Rs)#   8.6     1.2  
Price to earnings ratio (x)*         13.2  
(* trailing 12 months earnings) # As reported by the company

What has driven performance in 3QFY15?
  • The group's steel deliveries stood at 6.3 MT in 3QFY15. The India and European deliveries stood at 2.13 MT and 3.31 MT respectively during 3QFY15. The Indian operations reported weak performance due to headwinds in terms of dwindling demand and softening prices.

  • The group EBITDA per ton declined 20.2% YoY to Rs 4,905 per ton in 3QFY15. The EBITDA per ton from the Indian operations stood at Rs 9,294 during the quarter.

  • The India steel deliveries stood at 6.34 MT and the Europe steel deliveries stood at 9.86 MT during 9MFY15.

  • The operations in the Khondbond mine continue to remain suspended. However, operations at the Sukinda Chromite mine resumed operations. Mining operations in Jharkhand and Orissa also resumed coverage.

  • The operations in the South East Asia continue to remain under pressure due to the China factor. Deliveries in 9MFY15 stood at 2.83 MT.

  • Consolidated profits fell 68.8% YoY due to poor performance at the operating level partially cushioned by falling tax expenses.
What to expect?
At the current price of Rs 351, the stock is trading at a multiple of 13.2x its consolidated trailing twelve month earnings. Management expects the European operations to revive with demand expected to be in the region of 2.4% odd in 2015. However, imports are likely to remain threat putting pressure on EU steel mills. The company has been focusing on cutting costs and strengthening customer focus to boost sales in Europe where demand has virtually stagnated.

As far as the India business is concerned, mining operations at multiple locations have resumed during the quarter. However, slowing demand and softening prices is a cause of concern. Nonetheless, significant product mix improvement (more than a third of company's sales now comes from differentiated steel) is likely to support growth going forward.

Since the last update we have rolled forward our estimates to FY17. Our revised target price now stands at Rs 489 per share.

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