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Tisco: Value proposition - Views on News from Equitymaster
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  • Feb 21, 2003

    Tisco: Value proposition

    Tata Iron and Steel Company Ltd. (Tisco), India’s premiere steel company, has been on a dream run in the last one year on the back of strong performance by the company. Apart from the primary cause of this run-up, which is improving steel prices, various initiatives taken by the company have also added to its healthy performance. Tisco’s strategy of moving up the value chain, initiatives at branding its products and exploring newer markets (titanium) indicate the management’s drive to adding value.

    To begin with, the company has posted splendid results in 9mFY03. Running through the numbers, it can be seen that the company’s topline grew 20% whereas the growth in bottomline was a spectacular 565%. The growth in margins also showed an impressive rise of 680 basis points to nearly 26%. This was on the back of a less than proportionate growth of its operational expenses like power, freight and staff costs. These coupled with a 24% reduction in interest costs, led to the sharp spurt in net profits.

    (Rs m) 9mFY02 9mFY03 Change
    Net Sales 47,847 57,355 19.9%
    Other Income 476 372 -21.9%
    Expenditure 38,745 42,555 9.8%
    Operating Profit (EBDIT) 9,102 14,800 62.6%
    Operating Profit Margin (%) 19.0% 25.8%  
    Interest 3,065 2,326 -24.1%
    Depreciation 4,028 4,130 2.5%
    Profit before Tax 2,485 8,716 250.8%
    Other Adjustments -1,543 -2,105 36.4%
    Tax 116 1,118 862.0%
    Profit after Tax/(Loss) 825 5,493 565.5%
    Net profit margin (%) 1.7% 9.6%  
    No. of Shares (m) 368 368  
    Diluted Earnings per share* 3.0 19.9  
    P/E (at current price)   7.7  
    *(annualised and before other adjsts.)      

    However, improving margins are also the effect of a better product mix. On the value chain front, the company’s commissioning of the cold rolled (CR) mill has assisted in improving the company’s realizations. CR products are mainly used in high-end applications like automobiles and white goods industry (consumer goods like washing machines, refrigerators, etc.). The company has consistently made efforts at increasing the share of cold rolled products in its portfolio. This is clearly evident from the fact that the share of CR products has gone up from 12% in 9mFY01 to 34% in 9mFY03. Due to the value add proposition, they command a premium of about 25-30% compared to hot rolled products. As a result, it helps the company reap relatively better margins. Also, due to higher realizations and increasing share of CR products in the company’s product portfolio, its share in incremental revenues is higher.

    The company’s focus at enhancing its branded products has also paid off. Tisco markets some of its steel products under the brand names like Tata Tiscon, Tata Shaktee, Tata Bearings, Tata Tubes, etc. In the nine months ending December 2002, the company’s sale of branded steel has increased by 26%. Branded steel generally tends to realise Rs 1,000-2,000 higher than the other steel products. The turnover of Tata Steel branded products has gone up from Rs 4 bn in FY00 to over Rs 10 bn in FY02, a 250% increase within a short period of 2 years.

    However, as mentioned earlier, the primary cause of the improvement in the steel sector has been the continuous rise in steel prices. On the domestic front, the prices of steel have increased in the range of 20%-50% in the last nine months. This was on the back of a sustained rise in international steel prices due to various reasons, one of them being the increase in consumption of steel by China.

    At the current market price of Rs 153, the stock is trading at P/E of 7.7x annualized 9mFY03 earnings. With steel prices continuing to rule strong, the company’s good run is showing no signs of slowing down. Moreover, the company’s proposed financial restructuring of upto Rs 15 bn is likely to have a positive impact on the company’s financial statements. However, going forward, steel being a cyclical industry, the sustainability of steel prices will be tested. But given Tisco management’s drive at constant value addition and focus on improving operating efficiencies, the company is well placed to weather out even a tough pricing environment.



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