Tata Steel: European woes shrink margins

Tata Steel has announced its 3QFY11 results. The company has reported rise of 11% YoY and 112% YoY in consolidated sales and net profits during the period. Here is our analysis of the results:

Performance summary

• Consolidated topline grows by 11% YoY during 3QFY11 on account of higher average realisations compared with the corresponding period previous year.
• EBITDA margins improve from 11.3% in 3QFY10 to 11.8% in 3QFY11.
• The company registers a negative other income during the quarter.
• At the bottomline level, net profits surge by 112% YoY in 3QFY11 due to higher operating margins, lower interest and depreciation charges, exceptional gains due to restructuring cost and also lower effective tax rate.
• On a standalone basis, the company's topline grows by 16% YoY, while the bottomline rises by 27% YoY during the quarter.

Financial performance snapshot

	Standalone			Consolidated
(Rs m)	3QFY10	3QFY11	Change	3QFY10	3QFY11	Change
Net sales	63,749	73,974	16.0%	262,020	290,895	11.0%
Expenditure	42,180	45,768	8.5%	232,514	256,648	10.4%
Operating profit (EBDITA)	21,569	28,205	30.8%	29,506	34,246	16.1%
EBDITA margin (%)	33.8%	38.1%		11.3%	11.8%
Other income	2636	113		4,099	-1043
Interest (net)	4,157	3,354	-19.3%	7,630	7,432	-2.6%
Depreciation	2,622	2,864	9.2%	11,547	11,264	-2.4%
Exceptional income/(expense)	-	-		-1,957	1,223
Profit before tax	17,426	22,100	26.8%	12,471	15,729	26.1%
Tax	5,508	6,966	26.5%	8,148	6,240	-23.4%
Net profit/ (loss) before minority	11,918	15,135	27.0%	4,323	9,489	119.5%
Minority interest	-	-		-147.6	380.2
Share of profit of associates	-	-		551.4	161
No. of shares (m)#		902			902
Diluted earnings per share (Rs)*		78.16			-29.91
Price to earnings ratio (x)		8.4

#excludes 57 mn shares issued in the FPO; *trailing twelve month earnings

What has driven performance in 3QFY11?

• Tata Steel reported a 11% YoY growth in consolidated topline during 3QFY11. Total deliveries for the group fell by 5.7% YoY to 5.68 m tonnes in 3QFY11 from 6.02 m tonnes in 3QFY10. During the quarter, the company witnessed lower deliveries in Europe and Thailand due to weak demand. While 25% of the topline came from the domestic entity, the European entity accounted for about 62% of the sales during the quarter.

• On a standalone basis operating margins improved from 33.8% in 3QFY10 to 38.1% in 3QFY11 on the back of robust domestic performance. However, consolidated operating margins improved only marginally from 11.3% in 3QFY10 to 11.8 in 3QFY11 due to lower profitability from the European operations and an operating loss from the South-east Asian region. While the company's European operations witnessed a 40% YoY drop in the operating profit mainly due to high raw material costs and lower deliveries, the South-east Asian operations were affected during the quarter by rising scrap prices and a lag in implementing higher finished product prices.

• While the domestic operations contributed about 84% of the operating profits, the European operations contributed a paltry 12% during the quarter.

• On a consolidated basis, the company witnessed a negative other income during the quarter. However, lower year on year interest and depreciation charges and a significantly lower effective tax rate led the bottomline in 3QFY11 to surge by a whopping 112% YoY.
  Consolidated cost break-up

  (Rs m)	3QFY10	3QFY11	Change
  Raw materials	72,239	101,197	40.1%
  % sales	27.6%	34.8%
  Purchases	32,589	37,690	15.7%
  % sales	12.4%	13.0%
  Staff cost	41,999	36,087	-14.1%
  % sales	16.0%	12.4%
  Freight and handling	14,451	15,935	10.3%
  % sales	5.5%	5.5%
  Purchase of power	10,845	10,314	-4.9%
  % sales	4.1%	3.5%
  Other expenses	60,393	55,426	-8.2%
  % sales	23.0%	19.1%
  Total cost	232,514	256,648	10.4%
  % sales	88.7%	88.2%

• The company raised 34.77 bn from its follow-on public offer. Out of the total proceeds, Rs 10.9 bn would be used to pay the redemption amount of some maturing debentures. About Rs 18.75 bn would be utilised to part finance the 2.9 mtpa expansion project at the Jamshedpur plant.

• The group's net debt at the end of December 2010 stood at Rs 528.26 bn.

What to expect?

At the current price of Rs 644, the stock is trading at 1.2x its expected FY13 standalone book value per share (RPro subscribers can click here). We maintain our positive view on the stock from a medium term perspective.