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Tata Steel: Profits down on weak demand
Feb 18, 2013

Tata Steel has announced its December quarter (3QFY13) results. On a consolidated basis the company has reported a 3% YoY decline in topline. At the bottomline level the company reported a wider net loss when compared to the same period last year. Here is our analysis of the results.

Performance summary
  • Consolidated topline declined by 3% YoY on account of lower demand in both India and Europe.
  • Consolidated operating profit increased by 17% YoY while the operating margins increased by nearly 1.2%.
  • On a consolidated basis, the company reported a wider net loss when compared to the same period last year.
  • On a standalone basis, the company reported an increase of 11.8% YoY in net sales and a decline of 26.4% YoY in net profits.
  • For the nine months ended December 2012, on a consolidated basis the company reported a 1.2% YoY increase in net sales and a net loss as against net profits when compared to the same period last year.

Financial Performance
  Standalone results Consolidated results
(Rs m) 3QFY12 3QFY13 Change 3QFY12 3QFY13 Change
Net sales 83,819 93,703 11.8% 331031 321071 -3.0%
Expenditure 57,377 68,441 19.3% 311898 298682 -4.2%
Operating profit (EBITDA) 26,442 25,262 -4.5% 19,133 22,389 17.0%
EBDITA margin (%) 31.5% 27.0%   5.8% 7.0%  
Other income 1,976 357 -81.9% 2537 559 -78.0%
Interest (net) 4,811 5,090 5.8% 10600 10323 -2.6%
Depreciation 2,891 4,339 50.1% 11640 14628 25.7%
Profit before tax 20,716 16,190 -21.8% (570) (2,003) 251.1%
Extraordinary income/(expense) 0       (198)  
Tax 6,503 5,725.90 -11.9% 6303 5685 -9.8%
Profit after tax/(loss) 14,213 10,464 -26.4% (6,874) (7,886) 14.7%
Minority interest 0 0   641 80 -87.5%
Share of profit of associates 0 0   206 176 -14.8%
PAT after minority and sh. of assoc. profit 14,213 10,464 -26.4% (6,027) (7,630) NA
Net profit margin (%) 17.0% 11.2%   -1.8% -2.4%  
No. of shares (m) 959 971        
Diluted earnings per share (Rs)*   54.7        
Price to earnings ratio (x)*   6.9        
(* trailing 12 months earnings)

What has driven performance in 3QFY13?
  • Tata Steel reported a decline of 3% YoY in topline on a consolidated basis and 11.8% YoY growth in topline on a standalone basis during 3QFY13. This was due to lower demand in European and Indian operations. The group's steel deliveries in 9MFY13 declined by 2.2% to 17.6 mt (million tonnes) compared to 18 mt in 9MFY12. Deliveries in 3QFY13 stood at 5.83 mt versus 5.84 mt in 3QFY12.

    Cost break-up
      Standalone results Consolidated results 
    (Rs m) 3QFY12 3QFY13 Change 3QFY12 3QFY13 Change
    Raw materials consumed 21378 24308 13.7% 175116 139209 -20.5%
    % sales 25.5% 25.9%   52.9% 43.4%  
    Staff cost 7332 8839 20.6% 42938 47372 10.3%
    % sales 8.7% 9.4%   13.0% 14.8%  
    Purchase of power 4521 6244 38.1% 12511 14431 15.3%
    % sales 5.4% 6.7%   3.8% 4.5%  
    Freight and handling 4439 5633 26.9% 17207 18722 8.8%
    % sales 5.3% 6.0%   5.2% 5.8%  
    Other expenditure 19708 23418 18.8% 64126 78949 23.1%
    % sales 23.5% 25.0%   19.4% 24.6%  

  • On the domestic front, Tata Steel's operating profit declined by 4.5% YoY. The EBITDA/ tonne (t) in the Indian business fell to US$ 459 in 3QFY13 from US$ 476 in 2QFY12. Standalone other income was Rs 35 7m, down 85% QoQ. The company said this was due to lower cash balance (with more cash getting deployed towards the Orissa project) and also due to once a year dividend payment that happened in 2QFY13. Also tax rate was 35.4% in 3QFY12 compared to 29.8% in 3QFY13. Steel sales volumes in India were 1.9 mt, up 9% QoQ and 5% YoY. Increasing contribution from the new 3 mt plant is the primary reason for the rise. EBITDA per ton in India was Rs 13,387/t compared to Rs 14,545/t QoQ and Rs 16,322/t YoY. EBIT for the Indian steel division was Rs 20.4 bn, down 7% QoQ and 9% YoY. EBIT margin was 24%, down 200 bps from 2QFY13 and 540 bps from 3QF12.

  • Tata Steel Europe's (TSE) sales volumes declined 9.85% YoY (down 11.6% QoQ) to 3.35 m tonnes. 9MFY13 sales decreased by 5.43 YoY while EBITDA declined by 90.6% YoY. The company reported an EBITDA loss of Rs 4.28 bn in 3QFY13 as against Rs 7.81 bn in 3QFY12. TSE realized 96 m pounds during the 9 months ended December 2012 through seven disinvestment transactions.

  • Tata Steel's South-East Asian operations posted 24.2% YoY and 6.49% QoQ increase in volume. 9MFY13 sales increased by 8.21% YoY while EBITDA increased by 142.05% YoY. The company became EBITDA positive in 3QFY12 as against a loss in 3QFY13.

  • Net debt at the end of 3QFY13 stood at Rs 579.8 bn versus Rs 551.7 bn at the end of 2QFY13. Tata Steel will continue with capex of US$2.2-2.3 bn per year going forward. Management is focused on limiting capex to essential areas and would divert majority of it towards expansion projects in Orissa. Management has guided that close to USD $1.2 bn of capex from the above mentioned would be through internal accruals, while capex in Orissa would be under project financing.

What to expect?
Over the last 4 to5 quarters, Tata Steel has been unable to meet market expectations on the commissioning of the 3 mt Jamshedpur project, on costs for the new project due to delay in coke oven commissioning and on profitability improvement at Tata Steel Europe. The above, coupled with an uncertain commodity price environment, has kept Tata's stock performance muted over the last 12 months.

However we believe there are many near term triggers in place which might offer a boost to fundamentals. Full ramp-up of Indian steel volumes by the June 2013 quarter - this implies a volume increase of almost 35% in the high-margin Indian business from current levels. Sustainable cost reduction of about US$ 10/t in both March 2013 and June 2013 quarters as gains from coke oven commissioning are realized. Current steel price increases, even if modest in nature, should show up in results for 4QFY13 and 1QFY14.

At the same time, European operations should also see EBITDA/t stabilizing at US$30-35/t, driven by:

  1. Port Talbot BF rebuilt (it will have better efficiency, lower fuel rate, etc)

  2. Marginal improvement in pricing outlook in Europe and

  3. Lower raw material costs.
At the current price of Rs 373, the stock trades at a multiple of 6.9 times its TTM P/E on a standalone basis. We maintain our Buy view on the stock from a long term perspective.

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