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Tata Steel: Swings to profits

May 15, 2014

Tata Steel has announced the fourth quarter results of financial year 2013-2014 (4QFY14). On a consolidated basis topline grew by 22.4% YoY. The company reported a profit of Rs 10.3 bn as compared to a loss of Rs 65.2 bn in same quarter last year.

Performance summary
  • Consolidated total income increases 22.4% YoY during 4QFY14.
  • Consolidated operating profits increased 14.7% YoY, amidst healthy top line growth. However, margins declined to 11.8% in 4QFY14 as compared to 12.6% in 4QFY13.
  • The company reported a profit of Rs 10.3 bn in 4QFY14 as compared to a loss of Rs 65.2 bn in 4QFY13.
  • On a standalone basis topline increased by 13.2% YoY while net profits increased by 51.1% YoY.
  • The board of directors has recommended a dividend of Rs 10 per share for the fiscal under consideration.

  Standalone Results  Consolidated Results
(Rs m) 4QFY13  4QFY14  Change 4QFY13  4QFY14  Change
Total income  107,705 121,912 13.2% 346,505 424,281 22.4%
Expenditure  74,665 80,825 8.2% 302,815 374,170 23.6%
Operating profit (EBITDA) 33,040 41,088 24.4% 43,689 50,111 14.7%
Operating profit margin (%) 30.7% 33.7%   12.6% 11.8%  
Other income 4,747 530 -88.8% (679) 1,117 NM
Interest 4,594 4,646 1.1% 9,947 11,694 17.6%
Depreciation 4,608 4,616 0.2% 14,696 14719 0.2%
Profit before tax & exceptional items 28,586 32,355 13.2% 18,368 24,816 35.1%
Exceptional Items (6,841) (1,417.6) NM (74,128) (458) NM
Tax 8,652 11,151 28.9% 11,015 13,645 23.9%
Share of profit in associates 0 0 NA 99 28 -72.0%
Minority interest 0 0 NA 1,391 (381) NM
Profit after tax/(loss) 13,092 19,786 51.1% (65,285) 10,359 NM
Net profit margin (%) 12.2% 16.2%   -18.8% 2.4%  
No. of shares (m)   971.2        
Basic & diluted earnings per share (Rs)   20.4        
P/E ratio (x) *   7.1        
* On trailing 12 month basis

What has driven performance in 4QFY14?
  • Tata Steel reported a 22.4% YoY growth in topline on a consolidated basis and 13.2% YoY growth in topline on a standalone basis during 4QFY14. This was on back of higher volumes across regions. The group's steel deliveries increased by 10.1% to 26.56 MT (million tonnes) compared to 24.13 MT in FY13. Deliveries in 4QFY14 increased by 16.2% to 7.62 MT versus 6.56 MT in 4QFY13.

    Cost Break Up...
      Standalone results Consolidated results
    (Rs m) 4QFY13 4QFY14 Change 4QFY13 4QFY14 Change
    Raw materials consumed 31,128 30,936 -0.6% 15,0684 19,1164 26.9%
    % sales 28.9% 25.4%   43.5% 45.1%  
    Staff cost 10,293 7,975 -22.5% 48,530 53,639 10.5%
    % sales 9.6% 6.5%   14.0% 12.6%  
    Purchase of power 5,613 6,177 10.0% 13,468 15,952 18.4%
    % sales 5.2% 5.1%   3.9% 3.8%  
    Freight and handling 6,993 7,696 10.1% 20,311 26,437 30.2%
    % sales 6.5% 6.3%   5.9% 6.2%  
    Other expenditure 20638 28,040 35.9% 69,822 86,979 24.6%
    % sales 19.2% 23.0%   20.2% 20.5%  

  • On the domestic front, Tata Steel's Indian operations posted a net sales growth of 13.2% YoY mainly due to increase in volumes. Volumes increased by 5.7% YoY to 2.4 m tonnes. The standalone PAT was also up by 51.1% YoY due to strong performance at the operating level. On a consolidated basis, the company's net sales increased by 22.4% YoY. The European operations reported an EBITDA of GBP 81 m in 4QFY14 due to better cost control efforts. The consolidated EBITDA increased by 14.7% YoY.

  • The South East Asian operations reported a big turnaround as its Thailand operations returned to profitability after 4 years. The total deliveries increased to 1.07 MT in 4QFY14 as compared to 0.8 MT in 4QFY13. Nonetheless, the EBITDA from the South East Asian performance lagged considerably and stood at Rs 800 m in 4QFY14 as compared to Rs 2.24 bn in 4QFY13.

  • Tata Steel's consolidated underlying debt increased to Rs 684 bn in FY14. The company incurred a total capex of Rs 165 bn in FY14.
What to expect?
At the current price of Rs 457 the stock is trading at a multiple of 7.1x its standalone TTM earnings. As far as India operations are concerned the market conditions are stable and expected to improve in 2HFY15. There are signs of revival in auto, capital goods and construction sector. The EU demand is also expected to show recovery during the course of the year. However, political deadlock in Thailand is a cause of concern though it returned to profitability after 4 years.

All in all, despite an improvement in European operations, the high net debt situation with ongoing capex and very limited scope of deleveraging would continue to be an overhang on the stock performance. Hence, we maintain a sell on the stock.

We would like to gently remind you that your allocation to equities should be decided upon after keeping aside some safe cash. Also within your overall exposure to equities please ensure that you broadly follow our suggested and that no single stock comprises more than 5% of your portfolio.

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