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Tata Steel: Efficiency rules yet again - Views on News from Equitymaster
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Tata Steel: Efficiency rules yet again
Aug 1, 2008

Performance summary
  • The topline of the company grew by a robust 47% on a YoY basis led by both higher realizations and volumes.
  • The operating profits growth came in at 78% YoY, significantly higher than the topline, which can be attributed to lower overall expenditure (as % of sales). Operating profit margins expanded by 860 basis points.
  • The bottomline of the company grew by 22% on a YoY basis lower than the topline and operating profits growth, mainly due to exchange related losses of more than Rs 3 bn. Excluding the same, PBT growth has stood at an impressive 66% YoY.


(Rs m) 1QFY08 1QFY09 Change
Steel sales (000' tonnes) 1,041 1,150 10.5%
Net sales 41,976 61,650 46.9%
Expenditure 24,984 31,405 25.7%
Operating profit (EBDITA) 16,992 30,246 78.0%
EBDITA margin (%) 40.5% 49.1%  
Other income 1,461 122 -91.6%
Interest (net) 800 2,417 202.2%
Depreciation 2,112 2,168 2.6%
Profit before tax 15,541 25,783 65.9%
Extraordinary income/(expense) 3,484 (3,034)  
Tax 6,804 7,865 15.6%
Profit after tax/(loss) 12,221 14,884 21.8%
Net profit margin (%) 29.1% 24.1%  
No. of shares (m) 609.0 730.5  
Diluted earnings per share (Rs)   68.0  
Price to earnings ratio (x)**   9.8  
( ** on trailing twelve months earnings

What has driven performance in 1QFY09?
  • Tata Steel sold 1.15 m tonnes of steel during 2QFY08, nearly 11% higher than the 1.04 m tonnes it sold in the same quarter last year. However, topline in value terms has come in much higher at 47% YoY, a fact that can be attributed to improved realizations and better product mix. Moreover, the contribution from ferrous alloys and minerals segment to total revenue has increased to 13% as compared to previous year’s 7%. The realizations from ferrous alloys and minerals division have significantly boosted the topline growth. It should be borne in mind that the company has reduced its steel prices due to its commitment given to the government in order to curb inflation, or else the topline growth would have greater than this.

  • The operating profits growth came in at 78%, significantly higher than the topline. This can be attributed to tremendous improvements on operational front. The overall expenditure (as percentage of sales) was lower as compared to previous year. It should be remembered that the company sources most of its key raw material requirement like iron ore and coal through its own mines and hence, is insulated from the price volatilities of these commodities. Thus, when iron ore dependent steel producers are facing input cost pressures and are under pressure to maintain margins, Tata Steel has been able to expand its margins by 860 basis points (8.6%).

    cost break up table
    (Rs m) 1QFY08 1QFY09 Change
    Raw materials 7,524 9,530 26.7%
    % sales 17.9% 15.5%  
    Staff cost 3,766 4,719 25.3%
    % sales 9.0% 7.7%  
    Freight and handling 2,461 2,938 19.3%
    % sales 5.9% 4.8%  
    Purchase of power 2,328 2,619 12.5%
    % sales 5.5% 4.2%  
    Other expenses 8,905 11,599 30.2%
    % sales 21.2% 18.8%  

  • PBT growth at 66% has come in at a lower rate than the 78% growth in EBITDA, mainly due to the two-fold jump in interest expenses and a huge 92% drop in other income. The bottomline growth has come in even lower at 22% YoY. This was mainly due to mark-to-market related losses to the tune of Rs 3 bn. However, we can take solace from the fact that most of these are only notional in nature.

    What to expect?
    At the current price of Rs. 668 the stock is trading at a price to book value multiple of 1.5 times its expected FY10 book value per share and this makes it an attractive medium term bet. We are in the process of updating our research report on the company and will soon come out with our revised projections.

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