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Tisco on the move - Views on News from Equitymaster
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  • Jun 4, 2001

    Tisco on the move

    Tisco, the lowest cost steel producer (US$150 per tonne) in the world, has reported outstanding growth in profits for the year ended March ’01. The company’s richer product mix, marginally improved realization, continued cost control and slightly higher volumes have contributed in fueling the bottomline growth.

    Tisco’s profits excluding extraordinary items (VRS and power cost) jumped by 89% and topline grew by 16% (excluding sale of cement division which contributed about 3% of turnover in FY00). In volume terms the sales growth was dismal 6%, indicating the value growth through higher realization by the company. Over the last ten years, Tisco’s domestic sales in volume terms have increased at a compounded annual growth rate of 9%, which is on the lower side compared to other commodities. This is because of supply exceeding demand and slowing growth in industry as a whole. In FY01, the steel industry is expected to grow at the rate of 6%-8% per annum.

    For detailed financials click here

    The company is gradually changing its revenue mix in favour of cold roll products, which has comparatively higher margins. Currently hot roll (HR) products, cold roll (CR) products and semis contribute equally to its profits. In the current year value added HR sales (34% contribution to total sales volumes) added significantly to the turnover growth. While domestic sales grew by 11%, exports were lower by 15% in volume terms. Exports sales declined largely due to a 28% fall in HR coils sales (accounts for 39% of exports).

    Tisco has commissioned its CR mill in April ’00 in a record time of 26.5 months and is comparable to the best of its kind in the world. The second galvanizing line (which has started few days back) will target the high-end market for galvanized CR products. Its value added CR products are expected to account for 34% of total production in FY02 (12% in FY01). With comparatively higher realizations in CR products than HR products and the expected rise in steel prices, Tisco’s profits are likely to report over 30% growth in FY02.

    Although, Tisco is one of the low cost steel producers in the world, high cost of transportation makes its unviable for the company to export at competitive prices to other countries. Since the company’s plants are not situated near the ports, transportation costs nearly add US$ 30- 40 per tonne of steel. On the other hand its Korean competitor, Pohang’s plant is situated near the port allowing it to export at a competitive price to countries including South East Asian markets.

    International prices of HR coils collapsed from $350/tonne in 1997 to $180/tonne in 1998 in the wake of the Asian and the Russian crisis. At present the prices are ruling firm around $250/tonne and are expected to move up steadily in the current fiscal. This could further increase Tisco’s realizations, resulting in better margins.

    During FY01, the company repaid some of its debts, reducing the debt equity ratio to 0.96x from 1.1x in the previous year. As a result interest cost declined by 3% to Rs 3.8 bn. Tisco plans to redeem some of its high cost debts with its cash profits of over Rs 10 bn. It will pay off high cost 17% Tata Trust Bonds (amounting to Rs 5 bn) in the second half of the current fiscal. Among others, higher provision for power costs relating to previous years (Rs 862 m) and VRS expenses trimmed its effective tax rate to 8% from 11% in FY00. Improving cost management is expected to help the company in driving the earnings growth.

    In FY01, the company has web enabled its business and implemented an ERP package. Its 170 customers are today using this facility and contribute 80% to its sales. As part of its marketing initiatives, the company launched two new brands Tata Tiscon and Tata Shakti GC. Sales of new products contributed 5.5% to total revenues and inventory was lower by 28%. It has also stepped up its rural marketing initiatives to increase usage of steel in rural India.

    In order to optimally utilize its cash flow, Tisco has increased its stake in Tata SSL to 82% and plans to hold around 90% stake before the end of this year. The company has decided to absorb Tata SSL, which currently has a strong foothold in downstream products (wire rods).

    Among other developments, the company has also indicated its interest in the telecom sector, if the returns from the same are higher than its steel business. It has also decided to start a ferro chrome project in Australia. This is due to the fact that power costs in India is 5 times higher than Australia. In the next fifteen years, the difference is likely to be 15x. The project would require an investment of Rs 2.5 bn and would be initiated by this year-end. As part of a strategic decision to enter the mining business, Tisco is also foraying into titanium mining. The company is looking at alliances with global majors for manufacturing titanium dioxide.

    At the current market price of Rs 145 Tisco is trading at a P/E of 10 times FY01 earnings and a market cap to sales ratio of 0.7 times. The company is trading at a P/E of around 7 times FY02 projected earnings. With the aggressive cost control measures (per tonne cost of steel expected to come down further to US$ 125 in FY02) and steady increase in steel prices from the current levels, the company looks all set to grow.



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