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Tata Steel: European margins improve
Feb 13, 2014

Tata Steel has announced its December quarter (3QFY14) results. On a consolidated basis the company has reported a 14.4% YoY growth in topline. At the bottomline level the company reported a net profit as against a net loss when compared to the same period last year. Here is our analysis of the results.

Performance summary
  • Sales increased by 8.3% YoY in 3QFY14.
  • Consolidated topline grew by 14.4% YoY on back of higher sales volume.
  • Consolidated operating profit was up by 79% YoY while the operating margins increased by nearly 3.9%.
  • On a consolidated basis, the company reported a net profit as against a net loss when compared to the same period last year.
  • On a standalone basis, the company reported an increase of 8.3% YoY in net sales and 45.1% YoY in net profits.
  • For the nine month ended December 2013, on a consolidated basis the company reported a 6.1% YoY increase in net sales and a net loss as compared to a net profit in the same period last year.

Financial performance
  Standalone results Consolidated results
(Rs m) 3QFY13 3QFY14 Change 3QFY13 3QFY14 Change
Net sales 93,703 101,434 8.3% 321071 367358 14.4%
Expenditure 68,441 72,075 5.3% 298682 327293 9.6%
Operating profit (EBITDA) 25,262 29,359 16.2% 22,389 40,065 79.0%
EBDITA margin (%) 27.0% 28.9%   7.0% 10.9%  
Other income 357 2,648 641.4% 559 181 -67.6%
Interest (net) 5,090 4,529 -11.0% 10323 11084 7.4%
Depreciation 4,339 4,565 5.2% 14628 15221 4.1%
Profit before tax 16,190 22,913 41.5% (2,003) 13,942 -796.0%
Extraordinary income/(expense)       (198)  4  
Tax 5,726 7,725.50 34.9% 5685 8951 57.4%
Profit after tax/(loss) 10,464 15,188 45.1% (7,886) 4,995 -163.3%
Minority interest 0 0   80 27 -65.7%
Share of profit of associates 0 0   176 10 -94.3%
PAT after minority and sh. of assoc. profit 10,464 15,188 45.1% (7,631) 5,032 NA
Net profit margin (%) 11.2% 15.0%   -2.4% 1.4%  
No. of shares (m) 971  971   971 971  
Diluted earnings per share (Rs)*    59.1        
Price to earnings ratio (x)*   6.3        
(* trailing 12 months earnings)

What has driven performance in 3QFY14?
  • Tata Steel reported a 14.4% YoY growth in topline on a consolidated basis and 8.3% YoY growth in topline on a standalone basis during 3QFY14. This was on back of higher volumes across regions and cost saving measures in Europe. The group's steel deliveries in 9MFY14 increased by 8% to 18.9 mt (million tonnes) compared to 17.5 mt in 9MFY13. Deliveries in 3QFY14 increased by 8.6% to 6.38 mt versus 5.83 mt in 3QFY13.

    Cost break-up
      Standalone results Consolidated results
    (Rs m) 3QFY13 3QFY14 Change 3QFY13 3QFY14 Change
    Raw materials consumed 24308 23164 -4.7% 139209 155270 11.5%
    % sales 25.9% 22.8%   43.4% 42.3%  
    Staff cost 8839 9040 2.3% 47372 51709 9.2%
    % sales 9.4% 8.9%   14.8% 14.1%  
    Purchase of power 6244 6375 2.1% 14431 15719 8.9%
    % sales 6.7% 6.3%   4.5% 4.3%  
    Freight and handling 5633 7166 27.2% 18722 21460 14.6%
    % sales 6.0% 7.1%   5.8% 5.8%  
    Other expenditure 23418 26330 12.4% 78949 85237 8.0%
    % sales 25.0% 26.0%   24.6% 23.2%  

  • On the domestic front, Tata Steel's Indian operations posted a net sales growth of 8.3% YoY mainly due to increase in volumes. Volumes increased by 9.5% YoY to 2 m tonne. Net steel realizations were flat YoY at Rs 45,198/tonne. The standalone PAT was also up by 45.1% YoY due to higher other income. ? On a consolidated basis, the company's net sales increased by 14.4% YoY. TSE sales volumes grew by 5.6% YoY to 3.2 m tonne. The European operations reported an EBITDA/tonne of US $44 compared to a loss of US $26 in 3QFY13 due to better cost control efforts at the European operations. The consolidated EBITDA increased by 79% YoY. However because of higher tax rate of 64.2% due to absence of tax credit in its European operations, the net profit stood at Rs 5032 m compared to a loss of Rs 7631 m in 3QFY13.

  • The South East Asian operations were partly affected by the political instability at Thailand. However, the operations stabilised in Singapore while the facilities in China were ramped up. 9MFY14 deliveries totaled 2.91 mt, a 26% increase over the 2.31 mt in 9MFY13. Sales increased by 22% YoY. EBITDA increased by 39% YoY in 9MFY14. Improvement in EBITDA performance was due to operational efficiencies.

  • Tata Steel's underlying net debt increased to Rs 694 bn from Rs 628 bn in September 2013 driven by capex spends of Rs 40 bn primarily at Odisha project and working capital investments in Europe. With capex spend of Rs 90 bn for Odisha in next 1 year, we believe Asset/Investment sales are a must to ensure net debt remains at current levels.
What to expect?
Pared down domestic sales guidance for FY14/15, as well as proliferating debt were the two key negatives that emerged from the results. Continued resilience in TSE earnings along with management's commitment on manufacturing improvements to attempt TSE PBT breakeven are the key positives. Orissa phase 1 expansion in final stages with commissioning expected in end FY15. We believe that asset/investment sales are paramount to ensure peak out of debt. Higher tax incidence lead to a PAT disappointment, and management was far from guiding any tax rationalisation in FY15.

At the current price of Rs 373, the stock trades at a multiple of 6.3 times its TTM P/E on a standalone basis. Despite, improvement in European operations, the high net debt situation with ongoing capex and very limited scope of deleveraging would continue to be an overhang on the stock performance. Hence we maintain a sell on the stock.

We would like to gently remind you that your allocation to equities should be decided upon after keeping aside some safe cash. Also within your overall exposure to equities please ensure that you broadly follow our suggested asset allocation and that no single stock comprises more than 5% of your portfolio.

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