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Tisco: FY03 analystís meet brief

Jun 3, 2003

Indiaís largest private steel major, Tata Iron and Steel (Tisco), announced its results on May 29, 2003. The results have been impressive to say the least. This could be attributed, primarily, to the rise in steel prices in FY03 apart from Tiscoís efforts at improving internal efficiencies and product mix. We take a look at the key takeaways of the analyst meet held by the company recently. To begin with, let us briefly go through the financial performance of the company for FY03. Tiscoís topline (Rs. 98 bn) was just short of touching the Rs 100 bn mark. Of the topline achieved, more than Rs 13 bn (15% of net turnover) was garnered through exports. The contribution by exports was lower at about 9% in FY02. The company managed to reduce its weighted cost of capital from 12.1% in FY02 to 10.7% in FY03. Buoyant steel prices coupled with initiatives to improve efficiencies paid off as its operating margins increased by a huge 740 basis points and currently rests at 27%. This operating margin is next best only to China Steel (34%). Volume sales showed an increase of 11% YoY and this coupled with an almost 50% increase in steel prices, helped the company achieve a spectacular bottomline growth of nearly 400%. Moreover, the company became Economic Value Added (EVA) positive in FY03. EVA is an important indicator of the creation of shareholders wealth.

One thing apparent from Tiscoís analyst meet was the fact that the companyís efforts at concentrating on increasing its dependence on the value added products have carved out well in the last couple of years. As a percentage of total production, cold-rolled (CR) productsí share has increased from 10% in FY01 to 28% in FY03, which the company plans to further enhance to about 33%-34% in FY04. This in effect means that more and more of hot-rolled (HR) gets converted to CR as a result of which the share of HR production has reduced to 40% in FY03 from 54% in FY01. Also, sale of branded products (these realise better margins) has increased at a CAGR of 24% in the last two years.

Also in order to combat the cyclicality factor, Tisco is concentrating on improving its product mix further and increasing the contribution of sales from branded products. Since the last two years, the company has effectively managed to achieve its plans on this front. Richer product mix and branded products tend to insulate the company to a large extent from the volatility witnessed in steel prices. Moreover, its practice if entering into term contracts, rather than relying on spot sales, also helps the company perform relatively stable.

Tiscoís continuous efforts at improving efficiencies have earned it the distinction of being one of the lowest cost steel producers in the world. Also, World Steel Dynamics (a leading steel information service) has positioned Tisco 3rd amongst world-class steel makers, only after POSCO and BaoSteel. This positioning is based after considering various parameters like size, market standing, operational efficiencies, etc of the steel companies.

The outlook given by Tisco projects lot of optimism, not only for the sector, but also for the company itself. It foresees a reasonable growth of over 5% (domestic) in the years to come with demand emanating from the auto, construction and consumer durables segments. The firm demand, according to the company, will keep steel price stable. Moreover, the companyís continuous efforts on cost reduction and improving its product mix is likely to help it tide over any weakening steel cycle. However, we feel that increasing domestic steel capacities and those coming up in international markets must be viewed as a threat to steel prices, especially so if the demand fails to show the expected growth rates. This could fall heavily on the plans and bottomlines of steel companies.

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