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Tisco: Rolling out hot numbers

May 19, 2005

Performance summary
Tisco announced its 4QFY05 numbers today. Like any other steel company, there is no stopping for this private sector giant also, which continues to deliver splendid results quarter after quarter. The company has reported a strong 45% YoY growth in bottomline on the back of a 21% surge in topline. Its operating margins have also increased by 30 basis points during the quarter. Tisco ended FY05 on a very strong note wherein it nearly doubled its bottomline (up 99% YoY) on the back of a 36% increase in topline. Operating margins for the full year, which would dwarf those of some of the leading software companies in the country, were at 42% compared to 33% in FY04. Further, for the year ended March 2005, the company has declared a dividend of Rs 13 per share.

(Rs m) 4QFY04 4QFY05 Change FY04 FY05 Change
Net Sales 32,003 38,647 20.8% 107,024 144,990 35.5%
Expenditure 20,168 24,217 20.1% 72,070 84,536 17.3%
Operating Profit (EBDITA) 11,834 14,429 21.9% 34,954 60,454 73.0%
EBITDA margin (%) 37.0% 37.3%   32.7% 41.7%  
Other income 398 297 -25.4% 1,405 1,480 5.4%
Interest (710) 94 -113.3% 1,222 1,868 52.9%
Depreciation 1,856 1,522 -18.0% 6,251 6,188 -1.0%
Profit before tax 11,087 13,110 18.3% 28,886 53,878 86.5%
Extraordinary items (1,384) (383)   (2,227) (905)  
Tax 3,413 3,642 6.7% 9,197 18,231 98.2%
Profit after Tax/(Loss) 6,289 9,086 44.5% 17,462 34,742 99.0%
Net profit margin (%) 19.7% 23.5%   16.3% 24.0%
No. of Shares (m) 369.2 553.7   369.2 553.7  
Diluted earnings per share* 68.1 65.6   47.3 62.7  
Price to earnings ratio (x)   5.5     5.7  
(* annualised)            

About the company
Tata Iron and Steel Company (Tisco) is India's largest private sector steel company. The company has the distinction of being one of the lowest cost steel producers in the world at about US$ 200 per tonne for hot rolled coil. The company has a total steel capacity of 4 m tonnes with expansion plans of 1 m tonnes by September 2005. The company also intends to add another 2.4 m tonnes of capacity, which is likely to be completed by FY09 and another 6 m tonnes in phases by FY11. Tisco has been focusing on increasing contribution from value-added and branded products and derives over 1/3rd of its total revenues from these. Exports form about 14% of its revenues (FY05).

What has driven performance in FY05?
Cost break-up
(% of net sales) 4QFY04 4QFY05
Purchase of finished,
semi-finished & others
7.1% 8.9%
Raw materials 12.8% 10.1%
Staff costs 9.9% 8.2%
Power 4.9% 4.7%
Freight 5.9% 6.7%
Other expenditure 20.5% 21.0%
Topline run continues: Despite the fall in steel volume sales for the quarter (down 4%), which could be attributed to the lack of available steel to sell (production down 5% YoY in 4QFY05), the topline grew by 21%. Strong steel prices, both domestic and international, helped the company dole out this splendid performance. It must be noted that domestic steel prices continued their upward journey during 4QFY05 (up about 20% YoY during the quarter). Exports also played their part in contributing to the topline growth, which grew by 18% YoY during the March quarter. However, while the company does not release its export volume numbers, there is a possibility that realisations could have been under pressure considering the fact that steel prices in the international markets had started to weaken post January 2005. Another key contributor to the company's topline has been its Ferro Alloys and Minerals Division (FAMD), which recorded sales growth of 57% during the quarter (almost doubled in FY05). Both, increased volumes and better realisations aided the division's performance.

Operating margins hold on: Tisco managed a 30 basis points improvement in operating margins during 4QFY05, which are currently hovering in the region of about 37%. The total operating expenditure of the company increased by 20% YoY in absolute terms during the quarter. As can be seen in the table above, while some cost parameters (raw materials, staff costs and power) have improved as a percentage of net sales, deterioration in some others (purchase of semi-finished steel, freight and others) has negated these gains. It must be noted that unlike other steel companies, Tisco has a significant advantage in the sense that it is backward integrated. It meets all its iron ore requirements from captive sources and most of its coking coal requirements (about 60%) are met internally. Thus, the company does not face pressure on these fronts. Further aiding the margins have been the company's continued focus on sale of value added products, which fetch better margins.The sales of HR, CR and galvanized sheet products to the automobile industry continued to register impressive growth.

Net profits at all-time high: Tisco reported record net profits of over Rs 9 bn for the quarter, which is a growth of 45% over the comparable period of last year. It ended FY05 with Rs 35 bn net profits, again an all-time high. While, undoubtedly, strong steel realisations and better margins have aided this performance, lower interest outgo and lower tax provisioning has also provided the boost to profits.

What to expect?
At Rs 357, the stock is trading at 5.7 times its FY05 earnings and 2.7 times its book value. The FY05 performance has been in-line with our post 1HFY05 revised estimates. We are rather impressed with the company's performance and continue to believe that Tisco is amongst the most efficient companies in the country. Further, going forward into FY06 and beyond, the company would benefit from increased volume sales, as its capacity would stand augmented by September 2005 by an additional 1 MT. Also, contribution from NatSteel (Singapore) acquisition last year would start to reflect in the company's consolidated earnings from the current fiscal.

However, from an investors' point of view, it must be noted that every business has a fair value. Further, the continued pressure on operating margins (as seen in the chart above) since 2QFY05 needs a close watch. Though we believe that Tisco would continue to create records in FY06, both in terms of efficiencies and financial performance, at the current valuation, we remain rather cautious on the stock.

As per our valuation band (P/BV), Tisco is richly valued on FY06 basis, despite factoring in higher earnings for FY06. Further, the recent fall (15%-20%) in international steel prices since January 2005 is seemingly a sign of things to come. We believe that any slowdown in the Chinese economy and the creation of huge steel capacities across the globe are signs that make us wary of investing in steel stocks at the current juncture. While it is difficult to time the downturn of the steel cycle, we continue to remain apprehensive about the medium term growth prospects of the sector as a whole. It is better to be safe than sorry!

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