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Tata Steel: Walking a tight rope - Views on News from Equitymaster
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Tata Steel: Walking a tight rope
Jun 26, 2008

Performance summary
  • Standalone topline grows by 12% YoY, helped mainly by higher realizations.
  • Expenses grow at a lower rate than topline, resulting into an EBITDA margin expansion of 200 basis points (2.0%).

  • Bottomline growth comes in at 11% YoY during the fiscal despite a five fold jump in interest outgo. However, excluding extraordinary income, bottomline growth stands at 6%.

  • On the consolidated front, thanks to the Corus acquisition, bottomline has witnessed a three-fold jump on the back of a five-fold jump in topline.

(Rs m) FY07 FY08 Change
Net sales 175,520 196,933 12.2%
Expenditure 105,788 114,697 8.4%
Operating profit (EBDITA) 69,733 82,235 17.9%
EBDITA margin (%) 39.7% 41.8%  
Other income 4,337 3,350 -22.8%
Interest (net) 1,739 8,787 405.3%
Depreciation 8,193 8,346 1.9%
Profit before tax 64,138 68,452 6.7%
Extraordinary inc/(exp) (1,521) 2,211  
Tax 20,395 23,793 16.7%
Profit after tax/(loss) 42,222 46,870 11.0%
Net profit margin (%) 24.1% 23.8%  
No. of shares (m) 580.7 730.8  
Diluted earnings per share (Rs)* 57.8 64.1  
Price to earnings ratio (x)**   11.7  
(* annualised, ** on trailing twelve months earnings)

What has driven performance in FY08?
Tata Steel managed to hold its volumes at last year’s levels. This means that the 12% growth in topline has come mainly from improved realisations and better product mix. Although volumes growth both in the domestic markets as well as exports have remain robust for the industry, Tata Steel was unable to utilize the same to its advantage owing to capacity constraints. Adverse rupee/dollar rate also played spoilsport to some extent as while exports in dollar terms were up more than 20%, in rupee terms they were higher by only 9%.

The company’s operating profits have improved by nearly 18% YoY, better than the 12% growth in topline during the quarter and attributable to a lower than proportionate growth in costs. Although the company is self-sufficient in iron ore, it does depend on imports for other raw materials like zinc and coke. With prices of these raw materials going through the roof in recent times, raw material expenses came in higher by 12% YoY. Appreciation of rupee against the dollar helped cushion some of the impact. Tight control on other cost heads has resulted in the EBITDA margin expansion of 200 basis points for the fiscal.

cost break up
(Rs m) FY07 FY08 Change
Raw materials 30,390 33,908 11.6%
% sales 17.3% 17.2%  
Staff cost 14,568 15,948 9.5%
% sales 8.3% 8.1%  
Freight and handling 11,175 10,982 -1.7%
% sales 6.4% 5.6%  
Power 9,217 9,328 1.2%
% sales 5.3% 4.7%  
Purchase of finished, semi finished steel 4,506 4,470 -0.8%
% sales 2.6% 2.3%  
Other expenses 35,932 40,063 11.5%
% sales 20.5% 20.3%  

PBT for the full year has come in higher by 7% YoY, due mainly to the huge five fold jump in interest expenses. Other income has also negatively impacted margins, as it has fallen by 23% YoY. Higher interest expense is a consequence of huge debt taken by the company to fund the Corus acquisition. Further, had it not been for Rs 2 bn extraordinary income, the bottomline that has witnessed decent 11% YoY growth during the fiscal, might have shown a lower growth of 6%. The extraordinary income is attributable to the exchange rate related profits that have accrued to the company on its foreign currency borrowings.

On the consolidated performance front, owing to the low margins being enjoyed by Corus, bottomline growth has come in a lot lower than the topline growth of the consolidated entity. Operating margins too have fallen by a huge 16% as compared to FY07.

What to expect?
At the current price of Rs 757, the stock is trading at a multiple of 1.7 times our expected FY10 book value. The company’s standalone FY08 earnings have come in 6% higher than our estimates. We will update the research report of the company post the management con call scheduled for coming Monday.

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