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Tata Steel: India to the rescue - Views on News from Equitymaster

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Tata Steel: India to the rescue
Jun 26, 2009

Performance summary
  • Standalone topline grows by a robust 23.5% YoY, helped by both higher realizations and volumes.
  • Expenses grow at a higher rate than topline, resulting into an EBITDA margin contraction of 3.1%
  • Bottomline growth comes in at 11% YoY during the fiscal, due to higher depreciation charges and interest outgo.
  • On the consolidated front, while topline grows by 12% YoY, the bottomline declines by 60.6% YoY during the fiscal.
  • Has announced a dividend of Rs 16 per share (dividend yield of 4%)


Standalone Financial Snapshot
(Rs m) FY08 FY09 Change
Net sales 196,910 243,158 23.5%
Expenditure 116,773 151,823 30.0%
Operating profit (EBDITA) 80,138 91,334 14.0%
EBDITA margin (%) 40.7% 37.6%  
Other income 2,428 3,083 27.0%
Interest (net) 7,865 11,527 46.6%
Depreciation 8,346 9,734 16.6%
Profit before tax 66,355 73,156 10.3%
Extraordinary inc/(exp) 4,309 -  
Tax 23,793 21,139 -11.2%
Profit after tax/(loss) 46,870 52,017 11.0%
Net profit margin (%) 23.8% 21.4%  
No. of shares (m)   730.8  
Diluted earnings per share (Rs)*   71.2  
Price to earnings ratio (x)**   5.4  
(* annualised, ** on trailing twelve months earnings)

What has driven performance in FY09?
  • On a standalone basis, Tata Steel managed to grow its volumes by around 10% during the fiscal. This means that the 23.5% growth in topline has come from improved realizations coupled with increased volumes. Although steel prices have declined substantially during the second half of the fiscal, the average realizations for FY09 remained on the higher side as compared to the last fiscal. As per CMIE, CRC prices in Mumbai were higher by 17% in FY09 on a YoY basis and since most of the other products are also following a similar pattern, average realizations for Tata Steel must have also come in higher than previous year by a similar rate. It is also noteworthy that despite the slowdown, the company managed to grow its volumes by 18% in 2HFY09 over 1HFY09. All this put together augured well for the company to post a robust topline growth.

  • The company’s operating profits grew by 14% YoY, lower than the 23.5% growth in topline during the fiscal and attributed to a higher than proportionate growth in costs. This caused operating margins to decline by 3.1% to 37.6% in FY09. Operating expenses grew by 30% YoY mainly led by significant increase in raw material costs (as % of sales) during the fiscal. Also, the staff costs (as % of sales) were slightly higher. However, had the company not managed to reduce the freight handling, power and other expenses (as a % sales), the operating margins would have been lower than what they eventually turned out.

    Cost break-up…
    (Rs m) FY08 FY09 Change
    Raw materials 33,165 54,206 63.4%
    % sales 16.8% 22.3%  
    Staff cost 18,160 23,058 27.0%
    % sales 9.2% 9.5%  
    Freight and handling 11,406 12,512 9.7%
    % sales 5.8% 5.1%  
    Power 9,328 10,914 17.0%
    % sales 4.7% 4.5%  
    Purchase of finished, semi finished steel 3,879 3,589 -7.5%
    % sales 2.0% 1.5%  
    Other expenses 40,835 47,544 16.4%
    % sales 20.7% 19.6%  

  • Net profits grew by 11% YoY, lower than the topline growth during the fiscal. This was mainly on account of contraction at operating level coupled with higher interest costs and depreciation charges during the year. However, the growth in other income has positively impacted the bottomline.

  • On the consolidated performance front, the bottomline declined by around 60.6% YoY, despite a 12% growth in topline. This was mainly on account of extraordinary expenses coupled with higher operating costs during the fiscal. However, the PBT for the fiscal grew by 8% on a YoY basis.

    Consolidated Financial Snapshot
    (Rs m) FY08 FY09 Change
    Net sales 1,315,336 1,473,293 12.0%
    Expenditure 1,137,512 1,292,016 13.6%
    Operating profit (EBDITA) 177,824 181,277 1.9%
    EBDITA margin (%) 13.5% 12.3%  
    Other income 4,759 2,657 -44.2%
    Interest (net) 40,854 32,902 -19.5%
    Depreciation 41,370 42,654 3.1%
    Profit before tax 100,359 108,378 8.0%
    Extraordinary inc/(exp) 63,351 (40,945)  
    Tax 40,493 18,940 -53.2%
    Profit after tax/(loss) 123,218 48,492 -60.6%
    Net profit margin (%) 9.4% 3.3%  
    Profit after Minority interest & share of profit of associates 123,500 49,509  
    No. of shares (m) 730.8 730.8  
    Diluted earnings per share (Rs)*   67.7  
    Price to earnings ratio (x)**   5.7  
    (* annualised, ** on trailing twelve months earnings)

What to expect?
At the current price of Rs 385, the stock is trading at a multiple of 0.7 times our expected FY11 book value per share. While the company’s standalone topline growth has come in 5% higher than our estimates, the bottomline growth has been lower by 13% as compared to our estimates for the fiscal. We are in the process of updating the research report of the company and will release a revised target price.

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