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Tata Steel: A fighting performance - Views on News from Equitymaster

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Tata Steel: A fighting performance
Feb 27, 2009

Performance summary
  • Consolidated topline grows by 4% YoY during 3QFY09, despite lower realizations and falling demand of steel in the international markets.
  • Expenses grow at a higher rate than topline, resulting into an EBITDA margin contraction of 3.5%.
  • Bottomline fall (excl. minority interest) comes in at 44% YoY during the quarter, mainly on account of lower EBITDA margins and higher depreciation expenses.
  • For 9mFY09 bottomline (excl. minority interest) grows by 79.5% YoY on the back of a 26.6% YoY growth in topline.
  • Profit after minority interest and share of profit of associates declines by 38.6% YoY during the quarter, while the same grows by 79.6% during the 9mFY09.


Consolidated financial snapshot
(Rs m) 3QFY08 3QFY09 Change 9mFY08 9mFY09 Change
Net sales 318,985 331,910 4.1% 954,857 1,209,146 26.6%
Expenditure 280,283 303,336 8.2% 822,174 1,028,254 25.1%
Operating profit (EBDITA) 38,702 28,574 -26.2% 132,683 180,891 36.3%
EBDITA margin (%) 12.1% 8.6% 13.9% 15.0%
Other income 1,758 316 -82.0% 4,055 1,586 -60.9%
Interest (net) 10,592 9,114 -13.9% 32,813 25,565 -22.1%
Depreciation 10,038 10,852 8.1% 30,378 33,371 9.9%
Profit before tax 19,830 8,923 -55.0% 73,548 123,541 68.0%
Extraordinary income/(expense) 448 (2,007) 5,387 (8,848)
Tax 7,161 (405) 26,830 21,188 -21.0%
Profit after tax/(loss) 13,118 7,322 -44.2% 52,105 93,505 79.5%
Net profit margin (%) 4.1% 2.2% 5.5% 7.7%
Profit after Minority interest and share of profit of associates 13,251 8,139 -38.6% 52,809 94,864 79.6%
No. of shares (m) 609.2 730.8 609.2 730.8
Diluted earnings per share (Rs)* 152.5
Price to earnings ratio (x)* 1.1
( * on trailing twelve months earnings)

What has driven performance in 3QFY09?
  • Despite recessionary trends in the European markets which resulted into a slump in demand for steel and lower realizations, the company managed to grow its consolidated topline by 4% YoY during the quarter. However, sales volumes declined by around 24% YoY to around 6 m tonnes.

  • Operating expenses grew at much faster rate than the topline growth mainly on account of increase in raw material and power cost (as % sales) during the quarter. This resulted in decline in operating profits by 26.2% YoY and a contraction in EBITDA margins by 3.5% to 8.6% during the quarter. Had the company not managed to reduce the freight and handling charges and other expenses, the fall in operating profits would have been even greater.

    Cost break-upů
    (Rs m) 3QFY08 3QFY09 Change
    Raw materials 144,049 183,514 27.4%
    % sales 45.2% 55.3%
    Staff cost 42,319 44,579 5.3%
    % sales 13.3% 13.4%
    Freight and handling 16,804 13,893 -17.3%
    % sales 5.3% 4.2%
    Purchase of power 12,233 14,429 17.9%
    % sales 3.8% 4.3%
    Other expenses 64,879 46,922 -27.7%
    % sales 20.3% 14.1%

  • Consolidated bottomline (excl. minority interest) declined by 44% YoY mainly on account of decrease in operating profits and higher depreciation charges. Furthermore, a decline in the other income also adversely affected the bottomline. It may be noted that the accounting policy had been changed with the actuarial gains and losses on funds of employee benefits of Tata Steel UK now being accounted in reserve and surplus in the consolidated balance sheet. Had it been routed through the P&L account, profit for the current quarter would have been lower by Rs 42.5 bn and for the 9mFY09 would have been lower by Rs 86.3 bn.

What to expect?
At the current price of Rs 172, the stock is trading at a multiple of 0.3 times its expected FY11 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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