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Tata Steel: Profits stumble on Europe weakness

May 21, 2012

Tata Steel has announced its March quarter (4QFY12) results. On a consolidated basis the company has reported a 0.5% YoY growth in topline and 89.6% YoY decline in net profits. Here is our analysis of the results.

Performance summary
  • Consolidated topline remained flat during the quarter. Lower realisations in the European operations led to the underperformance in topline.
  • Consolidated operating profit and operating margin declined by 30.1% YoY and 4.1% YoY respectively on account of higher raw material cost and weak steel demand in Europe.
  • Consolidated bottomline declines by 89.6% YoY.
  • On a standalone basis, the company reported an increase of 13.6% YoY in sales and a decline of 8.6% YoY in net profits.
  • For the full year ended March 2012, consolidated net sales increased by 12.9% YoY while net profit declined by 40% YoY. On a standalone basis, net sales increased by 16% YoY and net profits declined by 2% YoY.
  • The company has recommended a dividend of Rs.12 per share for 2011-12.

Financial Performance
  Standalone results Consolidated results
(Rs m) 4QFY11 4QFY12 Change 4QFY11 4QFY12 Change
Net sales 83,408 94,792 13.6% 338238 339986 0.5%
Expenditure 52,633 64,878 23.3% 292791 308197 5.3%
Operating profit (EBITDA) 30,775 29,914 -2.8% 45,447 31,788 -30.1%
EBDITA margin (%) 36.9% 31.6%   13.4% 9.3%  
Other income 1,590 1,829 15.1% 3642 2220 -39.0%
Interest (net) 4,662 5,140 10.2% 9967 11280 13.2%
Depreciation 2,982 2,900 -2.8% 11664 10931 -6.3%
Profit before tax 24,721 23,704 -4.1% 27,458 11,798 -57.0%
Extraordinary income/(expense) 0 0   22,794 -  
Tax 7,644 8,101.10 6.0% 8764 9766 11.4%
Profit after tax/(loss) 17,077 15,603 -8.6% 41,487 2,032 -95.1%
Minority interest 0 0   185 301 62.8%
Share of profit of associates 0 0   84 2002 2288.8%
PAT after minority and sh. of assoc. profit 17,077 15,603 -8.6% 41,756 4,335 -89.6%
Net profit margin (%) 20.5% 16.5%   12.3% 1.3%  
No. of shares (m) 902 959   902 959  
Diluted earnings per share (Rs)*   67.8     56.2  
Price to earnings ratio (x)*   5.9     7.1  
(* trailing 12 months earnings)

What has driven performance in 4QFY12?
  • Tata Steel reported a 0.5% YoY growth in topline on a consolidated basis and 13.6% YoY growth in topline on a standalone basis during 4QFY11. This was due to lower realisations in European operations. Operating margins at the consolidated level saw a decline of 4.1% YoY and at the standalone level saw a decline of 5.3% YoY.

    Cost break-up
      Standalone results Consolidated results
    (Rs m) 4QFY11 4QFY12 Change 4QFY11 4QFY12 Change
    Raw materials consumed 19634 23988 22.2% 160932 165645 2.9%
    % sales 23.5% 25.3%   47.6% 48.7%  
    Staff cost 8500 9363 10.2% 42492 47221 11.1%
    % sales 10.2% 9.9%   12.6% 13.9%  
    Purchase of power 3432 4603 34.1% 10154 12743 25.5%
    % sales 4.1% 4.9%   3.0% 3.7%  
    Freight and handling 4315 4636 7.5% 17425 17611 1.1%
    % sales 5.2% 4.9%   5.2% 5.2%  
    Other expenditure 16753 22288 33.0% 61787 64977 5.2%
    % sales 20.1% 23.5%   18.3% 19.1%  

  • Net profits on a consolidated basis saw a decline of 89.3% YoY on account of high raw material cost and lower selling prices in Europe. Realisations in Europe declined by USD $59 per tonne. Net profit margins on a consolidated and standalone basis declined by 11% YoY and 3.5% YoY respectively.

  • The Group's steel deliveries in FY12 fell marginally by 1.1% to 24.2 m tonnes compared to 24.5 m tonnes in FY11. 4QFY12 steel deliveries fell by 6.5% to 6.2 m tonnes as compared to 6.6 m tonnes in 4QFY11.

  • India continues to shoulder primary responsibility for profitability, contributing 94% of EBITDA during the March quarter, aided by its cost advantage, better realisations in the domestic market, and the positive effect of a depreciating rupee on the cost of imported steel. However the underperformance in operating profit was due to some one-offs in other expenditure and also due to higher wage provision during the quarter which more than offset the impact of higher realisations. As a result net profits also declined by 8.6% YoY. Saleable steel production in 4QFY12 grew by 2.3% YoY to 1.78 m tonne. Sales for the quarter grew by 2.9% YoY to 1.77 m tonne. Production and Sales for FY12 was up by 4% and 3% as compared to previous year.

  • Tata Steel Europe (TSE) recovered from the EBITDA loss of USD $154 m recorded in 3QFY12 and clocked EBITDA of USD $29 m in 4QFY12. TSE could not avail the benefits of rising steel prices in Europe as it had already locked up most of its volumes at lower prices during 3QFY12. Hence, it registered lower realisation (down 5% QoQ). Nonetheless, higher sales volumes (up 6% QoQ to 3.6 m tonnes) and lower raw material cost/tonne (fell 9% QoQ) supported operational profit.

  • Volume in Asian subsidiaries has improved slightly due to gradually improving conditions in Thailand. We believe that the volumes are going to remain more or less stable as macro conditions are still tepid. Despite higher volumes, turnover for the quarter remained stable due to fall in realisation. The Asian subsidiaries have reported an EBITDA of USD $21 m during the quarter as compared to USD $18 m last year due to fall in scrap prices and improved conditions in Thailand subsidiary.

  • The company had a net debt of USD $9.4 bn at the end of March 2012.

What to expect?
The company expects its European operations to underperform in FY13 in terms of production, as its output is affected by its modernisation plans. That would leave the heavy lifting for the year to be done by its operations in other markets, such as India and South East Asia. That may appear as a negative development at first, as Tata Steel Europe contributes 57.8% of total deliveries. But a slackening in output is visible across steel-makers in Europe, as they react to the deteriorating market conditions in the region. This will help them contain supply in the market.

The Indian operations will continue to play a key role during FY13 as well. The company expects to produce about 1 m tonnes more of steel as its new facilities come on stream. That should see its contribution to revenue and profit increase significantly during the year. Trial production has already begun at its Jamshedpur facility for its brownfield project. Work on the greenfield project in Odisha is on track.

The company is confident that the first phase of producing 3 million tonne per annum (mtpa) of steel at its Odisha facility will be operational by early 2014. The key to a steel maker's profitability are raw material costs and product prices. Now, raw material prices have been easing, especially that of iron ore, mainly due to slack demand as steel makers idle facilities. In the current situation, one can expect that Tata Steel's profitability will improve in FY13, even if deliveries may not sparkle, especially at the consolidated level. However, uncertainty regarding steel prices still remains, especially with the slowdown in demand from China and fear of soft landing for Chinese economy.

At the current price of Rs 390, the stock trades at a multiple of 7.1 times its TTM P/E on a consolidated basis. We maintain our positive view on the stock from a long term perspective.

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