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Tata Steel: Haunted by realisations - Views on News from Equitymaster
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Tata Steel: Haunted by realisations
Jul 29, 2009

Performance summary
  • Standalone topline declines by 8.7%YoY mainly on account of lower realisations. Volumes witness a growth of 22.3% over corresponding previous quarter.
  • Operating profits decline by 42.4% YoY on account of higher operating costs, EBITDA margins slump by 18.2% during the quarter.
  • Bottomline suffers a fall of 46.9% YoY, slightly higher than operating profit mainly on account of higher interest costs and depreciation charges.


(Rs m) 1QFY09 1QFY10 Change
Steel sales (000' tonnes) 1,159 1,418 22.3%
Net sales 61,529 56,156 -8.7%
Expenditure 31,283 38,733 23.8%
Operating profit (EBDITA) 30,246 17,422 -42.4%
EBDITA margin (%) 49.2% 31.0%  
Other income 122 463 279.2%
Interest (net) 2,417 3,422 41.5%
Depreciation 2,168 2,532 16.8%
Profit before tax 25,783 11,932 -53.7%
Extraordinary income/(expense) (3,034)    
Tax 7,865 4,034 -48.7%
Profit after tax/(loss) 14,884 7,898 -46.9%
Net profit margin (%) 24.2% 14.1%  
No. of shares (m) 730.5 730.5  
Diluted earnings per share (Rs)   61.6  
Price to earnings ratio (x)**   7.2  
** on trailing twelve months earnings

What has driven performance in 1QFY10?
  • Tata Steel’s standalone topline declined by 8.7%YoY despite the volumes growth of 22.3%YoY during the quarter. This was mainly on account of lower steel prices, which resulted in lower realisations during the quarter. It may be noted that the steel prices had reached their all time highs during 1QFY09. However, due to the economic crisis, the prices have fallen significantly and are still down by more than 25% as compared to last year’s peak. Hence, the decline in the topline can be attributed to the lower steel prices during the quarter. Interestingly, Tata Steel had been able to raise steel prices by approximately Rs 2,000 per tonne on a QoQ basis as the demand continued to remain upbeat in the domestic markets.

  • Operating profits declined by 42.4% YoY, mainly on account of higher operating expenses coupled with lower realisations during the quarter. Operating expenses grew by 23.8%YoY, while lower steel prices impacted the operating profits by around Rs 8 bn during the quarter (as per the management). Raw material costs (as % of sales) grew significantly mainly on account of higher coking coal prices and increased production volumes as compared to corresponding quarter last year. In fact, the saleable steel production grew by around 30%YoY to 1.54 m tonnes during the quarter.

    Cost break-up…
    (Rs m) 1QFY09 1QFY10 Change
    Raw materials 9,190 16,056 74.7%
    % sales 14.9% 28.6%  
    Staff cost 4,719 5,062 7.3%
    % sales 7.7% 9.0%  
    Freight and handling 3,041 3,152 3.7%
    % sales 4.9% 5.6%  
    Purchase of power 2,619 3,284 25.4%
    % sales 4.3% 5.8%  
    Other expenses 11,715 11,179 -4.6%
    % sales 19.0% 19.9%  

  • Net profits decline at 46.9% has come in higher than the operating profits decline during the quarter. This was mainly on account of higher interest and depreciation charges. However, had there been no significant rise in other income and decline in tax outgo, the bottomline would have declined further.

What to expect?
At the current price of Rs 453, the stock is trading at a multiple of 0.7 times our expected FY12 book value per share. Although the performance of the company has come in below our expectations, it will not significantly affect our medium term price target as we use asset based valuation method of book value. Having said that, if the performance of the company continues to come below par during the next quarter as well, we will have to revise our estimates.

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