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Tata Steel : China, India drive the show - Views on News from Equitymaster

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Tata Steel : China, India drive the show
Feb 17, 2010

Performance summary
  • Topline declines by 21% YoY during 3QFY10 despite improvement in demand in the developed markets from 2QFY10 lows.
  • EBITDA margins expand to 11.3% in 3QFY10, up from 8.7% in 3QFY09. Other income grows by 11 times during the quarter.
  • Bottomline declines by 42% YoY in 3QFY10 on the back of higher tax outgo despite the improvement in operating margins.
  • For 9mFY10, the company registers a 38% decline in the topline and turns negative at the bottomline level.


Consolidated financial snapshot
(Rs m) 3QFY09 3QFY10 Change 9mFY09 9mFY10 Change
Net sales 331,993 262,020 -21.1% 1,208,760 748,894 -38.0%
Expenditure 303,206 232,514 -23.3% 1,023,998 715,969 -30.1%
Operating profit (EBDITA) 28,786 29,506 2.5% 184,762 32,925 -82.2%
EBDITA margin (%) 8.7% 11.3%   15.3% 4.4%  
Other income 352 4,099   1,623 6,318 289.3%
Interest (net) 9,114 7,630 -16.3% 25,566 23,621 -7.6%
Depreciation 10,852 11,547 6.4% 33,371 33,972 1.8%
Profit before tax 9,172 14,428 57.3% 127,447 (18,350)  
Extraordinary income/(expense) (2,255) (1,957)   (12,754) (13,258)  
Tax (405) 8,148   21,188 13,652 -35.6%
Net profit/ (loss) before minority 7,322 4,323 -41.0% 93,505 (45,261)  
Minority interest 2,060 (148)   599 (110)  
Share of profit of associates (1,244) 551 -144.3% 760 937 23.3%
Net profit/(loss) after minority 8,139 4,726 -41.9% 94,864 (44,433)  
Net profit margin (%) 2.5% 1.8%   7.8% -5.9%  
No. of shares (m)         886.7  
Diluted earnings per share (Rs)*         (101.3)  
Price to earnings ratio (x)*         NA  
* On trailing twelve months earnings

What has driven performance in 3QFY10?
  • During 3QFY10, Tata steel posted a 21% YoY decline in consolidated topline even though GDP contraction has slowed in the western markets leading to better demand than the 2QFY10 lows. China and India continue to be the two bright spots in the world steel market. The group delivered 6.2 m tonnes (mt) of steel, the same as during 2QFY10.

  • During the quarter, raw material cost declined by 4.3% while purchases declined by 10.9% (as a percentage of sales) leading to an expansion in operating margins. However, cost-saving benefits achieved in 9mFY10 from the ‘Weathering The Storm’ and ‘Fit For The Future’ programmes at Tata Steel Europe amounted to around US$ 1.2 bn.

    Cost break-up
    (Rs m) 3QFY09 3QFY10 Change
    Raw materials 105,715 72,239 -31.7%
    % sales 31.8% 27.6%  
    Purchases of steel, semi finished steel & other products 77,450 32,589 -57.9%
    % sales 23.3% 12.4%  
    Staff cost 44,556 41,999 -5.7%
    % sales 13.4% 16.0%  
    Freight and handling 13,992 14,451 3.3%
    % sales 4.2% 5.5%  
    Purchase of power 14,460 10,845 -25.0%
    % sales 4.4% 4.1%  
    Other expenses 47,034 60,393 28.4%
    % sales 14.2% 23.0%  
    Total cost 303,206 232,514 -23.3%
    % sales 91.3% 88.7%  

  • The Tata Steel group’s liquidity (including undrawn credit lines) on 31st December 2009 stood at Rs 133 bn. Its net debt on that date stood at Rs 482 bn.

What to expect?
At the current price of Rs 579, the stock trades at a multiple of 1x its expected FY12 standalone book value per share. Although there has been a lot of concern in the market with respect to Corus operations, we have already been conservative in our valuation of the company and hence, do not feel the need to revisit our numbers on that front. We remain positive on the stock from a medium term perspective.

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