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Tata Steel: Saved by the dollar - Views on News from Equitymaster
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Tata Steel: Saved by the dollar
Jul 31, 2007

Performance summary
  • Standalone topline grows by 7% YoY despite similar drop in amount of steel sold.

  • Expenses grow at a slightly lower rate than topline, resulting into an EBITDA margin expansion of 10 basis points.

  • Bottomline grows by an impressive 28% YoY, thanks mainly to exchange rate related gains. Absent such gains, bottomline falls by 10% YoY.

  • Consolidated results expected by the end of August 2007.

(Rs m) 1QFY07 1QFY08 Change
Steel sales (000' tonnes) 1,115 1,041 -6.6%
Net sales 39,159 41,976 7.2%
Expenditure 23,346 24,984 7.0%
Operating profit (EBDITA) 15,813 16,992 7.5%
EBDITA margin (%) 40.4% 40.5%
Other income 779 1,461 87.5%
Interest (net) (293) (800) 173.1%
Depreciation 1,951 2,112 8.3%
Profit before tax 14,348 15,541 8.3%
Extraordinary income/(expense) (184) 3,484
Tax 4,630 6,804 47.0%
Profit after tax/(loss) 9,534 12,221 28.2%
Net profit margin (%) 24.3% 29.1%
No. of shares (m) 553.5 609.0
Diluted earnings per share (Rs)* 62.6 80.3
Price to earnings ratio (x)** 8.4
(* annualised, ** on trailing twelve months earnings)

What is the company’s business?
Tata Steel is India’s largest private sector steel company, and has the distinction of being one of the lowest cost steel producers in the world at about US$ 200 per tonne for hot rolled coil. The company has a total steel capacity of 5 m tonnes (MT), and intends to add another 2.4 MT of capacity, which is likely to be completed by FY09 and another 6 MT in phases by FY11. The company has been focusing on increasing contribution from value-added and branded products and derives over one-third of its total revenues from these. Recently, the company took a major step towards becoming a leading producer of steel globally by acquiring Corus Group Plc, Europe’s second largest steel producer. With this acquisition, the total consolidated capacity of the company has touched 25.6MTPA, making it the sixth largest player globally.

What has driven performance in 1QFY08?
Topline up, volumes down: Tata Steel sold 1 m tonne of steel during 1QFY08, nearly 7% lower than the 1.1 m tonne it sold same quarter last year. It should be noted that the decline in sales was not driven by some external factors but was a consequence of plant shutdown. Despite this, topline in value terms has grown by 7% YoY, a fact that could be attributed to improved realisations. With infrastructure spending in the country remaining robust, companies like Tata Steel have been able to command higher prices. We believe that prices should remain firm in the medium term as not only do steel capacities take a long time to come onstream, the demand scenario is also unlikely to slow down anytime soon.

Margins maintained: The company’s operating profits have improved by nearly 8% YoY, slightly better than the 7% growth in topline and attributable to a lower than proportionate growth in costs. Here, while staff costs and other expenses have grown at a robust rate, control over cost heads like raw materials, freight and power costs has helped the company post a marginal 10 basis point expansion in margins.

Cost break-up…
(Rs m) 1QFY07 1QFY08 Change
Raw materials 7,640 7,524 -1.5%
% sales 19.5% 17.9%
Staff cost 3,034 3,766 24.1%
% sales 7.7% 9.0%
Freight and handling 2,585 2,461 -4.8%
% sales 6.6% 5.9%
Purchase of power 2,285 2,328 1.9%
% sales 5.8% 5.5%
Other expenses 7,802 8,905 14.1%
% sales 19.9% 21.2%

PBT growth at 8% has come in at a slightly higher rate than the 7.5% growth in EBITDA, due mainly to the huge 88% YoY rise in other income. Interest expenses have also risen strongly, registering a jump of 173% YoY. This is a consequence of further debt taken on its books in order to fund the Corus deal. Extraordinary income during the quarter has come in at an impressive Rs 3.4 bn and this has helped the company post a bottomline growth of 28% YoY. This gain is attributable to the exchange rate related profits that have accrued to the company on its foreign currency borrowings. Absent such gains, the bottomline growth stands at a negative 10% YoY.

What to expect?
At the current price of Rs 648, the stock is trading at a multiple of 8.4 times its trailing twelve-month earnings. We are in the process of updating our research report on the company and will soon come out with our forward estimates for the same.

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Feb 23, 2018 (Close)


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