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Tata Steel: Europe remains a drag on profits - Views on News from Equitymaster

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Tata Steel: Europe remains a drag on profits
Feb 13, 2012

Tata Steel has announced its December quarter results. On a consolidated basis the company has reported a 13.8% YoY growth in topline and 160.1% YoY decline in net profits. Here is our analysis of the results.

Performance summary
  • Consolidated topline grows by 13.8% YoY during the quarter, led by strong volume growth.
  • Consolidated operating profit and operating margin declined by 49.9% YoY and 6.6% YoY respectively on account of higher raw material cost.
  • Consolidated bottomline turn negative during the quarter. This was due to higher cost and lower demand for steel from Europe. Demand from Thailand also declined due to floods in the country.
  • On a standalone basis, the company reported an increase of 13.3% YoY in sales and a decline of 6.1% YoY in net profits.
  • For the nine months ended December 2011, consolidated net sales and net profits increased by 16.4% YoY and 0.03% YoY while standalone net sales increased by 16.1% YoY and net profits remained flat.


Financial Performance
  Standalone results Consolidated results
(Rs m) 3QFY11 3QFY12 Change 3QFY11 3QFY12 Change
Net sales 73,974 83,819 13.3% 290895 331031 13.8%
Expenditure 45,768 57,513 25.7% 256648 313858 22.3%
Operating profit (EBDITA) 28,205 26,306 -6.7% 34,246 17,173 -49.9%
EBDITA margin (%) 38.1% 31.4%   11.8% 5.2%  
Other income 113 -263 NA -1043 1383 NA
Interest (net) 3,354 2,020 -39.8% 7432 7069 -4.9%
Depreciation 2,864 2,891 0.9% 11264 11640 3.3%
Profit before tax 22,100 21,133 -4.4% 14,506 (153) NA
Extraordinary income/(expense) 0 0   1,223 -  
Tax 6,966 6,919.90 -0.7% 6240 6720 7.7%
Profit after tax/(loss) 15,135 14,213 -6.1% 9,489 (6,874) NA
Minority interest 0 0   380 641 68.5%
Share of profit of associates 0 0   161 206 28.2%
PAT after minority and sh. of assoc. profit 15,135 14,213 -6.1% 10,030 (6,027) NA
Net profit margin (%) 20.5% 17.0%   3.4% -1.8%  
No. of shares (m) 902 959   902 959  
Diluted earnings per share (Rs)*   71.3     93.0  
Price to earnings ratio (x)*   6.7     5.1  
(* trailing 12 months earnings)

What has driven performance in 3QFY12?
  • Tata Steel reported a 13.8% YoY growth in topline on a consolidated basis and 13.3% YoY growth in topline on a standalone basis during 3QFY11. This was due to higher volumes despite steel prices declining in Europe by USD $43. However net realisations were higher due to increased retail sales and favourable sales mix in long products as well as increased domestic market focus.

  • Operating margins on a consolidated basis saw a decline of 6.6% YoY because of significant increase in raw material costs which saw a rise of 24.3% YoY and increase in power and fuel costs which rose by 21.3% YoY during the quarter ended December 2011. The European unit, which contributes about two-thirds of the group's output and buys all its raw materials from outside, faced a 13% increase in coking coal prices, compared with a 3.5% increase in the price of steel hot-rolled coils in the quarter.

    Cost break-up
      Standalone results Consolidated results
    (Rs m) 3QFY11 3QFY12 Change 3QFY11 3QFY12 Change
    Raw materials consumed 17586 21378 21.6% 140832 175116 24.3%
    % sales 23.8% 25.5%   48.4% 52.9%  
    Staff cost 6275 7332 16.8% 37322 42938 15.0%
    % sales 8.5% 8.7%   12.8% 13.0%  
    Purchase of power 3454 4521 30.9% 10314 12511 21.3%
    % sales 4.7% 5.4%   3.5% 3.8%  
    Freight and handling 3968 4439 11.9% 15935 17207 8.0%
    % sales 5.4% 5.3%   5.5% 5.2%  
    Other expenditure 14485 19843 37.0% 52246 66085 26.5%
    % sales 19.6% 23.7%   18.0% 20.0%  

  • Net profits on a consolidated basis turned negative on account of high raw material cost and lower selling prices in Europe. On a standalone basi, negative other income and higher tax rate has forced the company to report 6.1% YoY de-growth.

  • The Group's steel deliveries for nine months ended December 2011 rose by 0.8% to 18.01 m tonnes as compared to 17.86 m tonnes in corresponding period last year. Steel deliveries in 3QFY'12 fell slightly to 5.84 m tonnes from 5.9 m tonnes in 3QFY'11.

  • The performance of Tata Steel Europe continued to be poor. Value of inventories of raw materials and finished goods at some of the subsidiary companies especially in Tata Steel Europe has been written down to recognise the fall in market price of these products. The write down for the quarter ended December 31, 2011 amounts to Rs 7.4 bn (Rs 2226.3 m for the preceding quarter, Rs 9.9 bn for the nine months ended December 2011).

  • The company's subsidiary in Singapore (Natsteel Holdings) performed much better on account of cost reduction programme undertaken by the company. Downstream sales were best ever. The performance of subsidiary in Thailand (Tata Steel Thailand) was severely affected due to floods in the country. However strengthening of the regional distribution channel by appointing 33 new dealers, led to an increase of 36% sales as compared to previous quarter.

  • The company had a net debt of USD $9.5 bn at the end of December 2011.

What to expect?
The scenario in Europe is showing signs of improvement as prices have started to strengthen. Prices in Europe are already higher by EUR 90 per tonne in January. A decline in raw material prices and closure of plants in Europe can add to the operating profit considerably. With China expected to reduce production by nearly 100 m tonnes from its peak level, steel prices are expected to remain firm with a higher possibility of reduction in raw material prices. As far as the Indian operations are concerned, the fourth quarter will see the benefit of Rs 1,500 per tonne hike in steel prices plus also an addition of 1 m tonnes in capacity, which is expected to be commissioned in the fourth quarter of the current fiscal.

At the current price of Rs 475, the stock trades at a multiple of 5.1 times its TTM P/E on a consolidated basis. We maintain our positive view on the stock from a medium term perspective.

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