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Tata Steel: A peep into past II

Jun 18, 2008

In the last article , we saw how well Tata steel managed its business during the cyclical downturn of 1999-2003. Now let us have a look at the financial performance of the company during the upturn i.e. between 2003 and 2007, which was also a landmark period for Tata steel as it acquired Corus steel of UK to become sixth largest producer in the world. However, in this article, we will consider only the standalone performance of the company Rising Revenues: The topline of the company during this period grew at a CAGR of 19.1%. Volumes and realizations from saleable steel grew at a CAGR of 6.9% and 12.2% respectively. The four-year period under consideration was an exciting period for the world steel industry. It witnessed major consolidation and capacity expansion. The increasing demand for steel and rising raw material prices significantly impacted the price of steel. The company was able to achieve higher realizations compared to its peers in the industry as it received premium for its product and moreover a well-managed product portfolio added to the topline growth.

Sustained operating profits: The company continued to grow its operating profits at a CAGR of 31.7%, almost similar to the previous four-year period. The company also continued to increase its operating profit margin from 25.7% in FY03 to 38.4% in FY07. The company is recognized as amongst the lowest cost steel producer in the world and it did show up in the company's robust operating margins. Furthermore, when raw material prices were rising significantly, the company experienced a rather low growth in operating expense per tonne, which grew at a CAGR of 6.3% only.

Mounting bottomline: The net profits of the company grew at CAGR of 42.9%, which was significantly higher compared to last period (between 1999 and 2003 it was 37.6%). This again was attributed to increased interest coverage ratio, which climbed from 5.7 in FY03 to 35.4 in FY07. Even the net profit margins showed a rising trend from 11.6% in FY03 to 24.1% in FY07.

After having looked at the performance of Tata Steel over the entire steel cycle, it has belied the notion that commodity companies face troubled times during a downturn. Hence, while investment in such companies may not lead you to strike the proverbial honey pot during an upturn, the chances of you losing a good 40%-50% of your investments during a downturn are also on the lower side.

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