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Tisco: Realisations led growth

May 29, 2003

India’s largest private sector steel major, Tata Iron and Steel Company Ltd. (Tisco), has announced its 4QFY03 and FY03 results. The company has managed to beat our expectations by registering a spectacular performance in, not only the March quarter, but also for the full year (FY03). The company has reported a robust topline growth in 4QFY03 of 39%, while its bottomline shot up by 283%. However, the commendable feat is the huge improvement in operating margins to 30% in 4QFY03 compared to 19% in the corresponding quarter last year. For the full year topline growth has been 30% while bottomline growth has been better at 394%. However, it must be noted here that the above numbers include the results of erstwhile Tata SSL Ltd. Accordingly, the previous years figures are not comparable with those of the current year.

(Rs m)4QFY024QFY03ChangeFY02FY03Change
Net Sales 19,219 26,648 38.7% 67,079 87,213 30.0%
Other Income 309 130 -58.0% 856 504 -41.2%
Expenditure 15,597 18,664 19.7% 54,367 64,193 18.1%
Operating Profit (EBDIT) 3,622 7,984 120.4% 12,712 23,020 81.1%
Operating Profit Margin (%)18.8%30.0% 19.0%26.4% 
Interest 633 578 -8.6% 3,698 3,048 -17.6%
Depreciation 1,219 1,328 8.9% 5,248 5,555 5.9%
Profit before Tax 2,079 6,207 198.6% 4,623 14,921 222.7%
Other Adjustments (498) (145)- (2,113) (2,296)-
Tax 356 1,372 285.7% 461 2,502 442.7%
Profit after Tax/(Loss) 1,225 4,691 283.0% 2,049 10,123 394.1%
Net profit margin (%)6.4%17.6% 3.1%11.6% 
No. of Shares (m) 368 368   368 368  
Diluted Earnings per share* 13.3 51.0   5.6 27.5  
P/E (at current price)     5.6  
*(annualised and before other adjsts.)      

The huge jump in topline is primarily a factor of the sharp surge witnessed in steel prices during FY03. Apart from the strong prices, the company’s volume sales also showed a healthy growth (11%). Thus, in effect, this percolated down to the operating levels, which have registered praiseworthy improvements as can be seen in the table above. Just to throw some light on the price movements seen in the last fiscal, the average steel prices of hot rolled coils, after touching lows of about Rs 12,000/tonne (inclusive of freight and excise) in January 2002, have since then been on an uptrend. From the levels of January 2002, the prices have improved by anything between 50-55%. Similarly, the prices of cold rolled sheets have also increased by about 45-50% from Rs 16,000/tonne levels to the current Rs 23,500/tonne.

Also, operational expenses of the company have risen by only 20% in 4QFY03 as compared to a 39% growth in topline. The story is similar for the full year also. Better asset sweating and resource utilisation has led to lower operational costs on incremental steel production leading to better operational efficiency. Just to put things in perspective, raw materials as a percentage of net sales has come down from 17% in FY02 to 15% in FY03. Similarly, Tisco’s efforts on the employee rationalisation front seems to have yielded positive results for the company with staff costs declining from over 16% as a percentage of net sales in FY02 to under 14% in FY03. Power costs have also reduced from 10% to 8% YoY. All this has led to a reduction in total operating expenses as a percentage of net sales from 81% to 71% YoY.

TISCO has managed to reduce its interest expenses by 18% in FY03 taking advantage of the low interest rate scenario. However, the rise in depreciation (6%) could be due to the increased steel capacity of the company. The company incurred extraordinary expenses (Rs 2.3 bn) on account of employee separation costs (ESS). However, it must be noted that the effect of the financial restructuring has been given in the March quarter. As a result, ESS charge to the profit and loss account was lower by Rs 567 m during 4QFY03 and FY03. Net profits have however, increased considerably by 394% despite the higher YoY extraordinary expenses.

At Rs 153, the stock is currently trading at a P/E of 5.6x FY03 earnings. Better steel realisations have kept the TISCO counter buoyant in the last fiscal. However, performance of the stock, to a large extent, will be dependent on the fortunes of steel prices. It must be noted here that steel being a cyclical commodity, prices tend to be volatile. And with prices having run up sharply in the last 15 months, the sustainability of steel prices at higher levels continue to remain a cause for concern. Moreover, with US steel producers lobbying against Indian steel exports to the country, there is a possibility of the US imposing duty restrictions on steel imports, which could have a negative impact on the export sales of the company. However, in the long run, with the company’s continuous efforts at improving operational efficiencies, targeting exports markets and concentration on value added products, it looks like the company could see better days ahead.

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