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Tata Steel: Higher taxes dent profits - Views on News from Equitymaster

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Tata Steel: Higher taxes dent profits
Aug 14, 2014

Tata Steel has announced its June quarter (1QFY15) results. On a consolidated basis the company has reported a 11% YoY growth in topline. However, the bottomline declined by 70.4% YoY on the back of higher taxes. Here is our analysis of the results.

Performance summary
  • Consolidated topline grew by 11% YoY.
  • Consolidated operating profit was up by 15.8% YoY while the operating margins increased by nearly 50 bps.
  • On a consolidated basis, net profits declined by 70.4% YoY due to higher taxes.
  • On a standalone basis, the company reported an increase of 10.7% YoY in net sales and 67.2% YoY in net profits.

Financial Performance
  Standalone results Consolidated results
(Rs m) 1QFY14 1QFY15 Change 1QFY14 1QFY15 Change
Net sales 94,554 104,683 10.7% 328,048 364,272 11.0%
Expenditure 66,211 72,124 8.9% 291,168 321,546 10.4%
Operating profit (EBITDA) 28,343 32,559 14.9% 36,880 42,726 15.8%
EBDITA margin (%) 30.0% 31.1%   11.2% 11.7%  
Other income 1,442 1,435 -0.5% 1,836 2,161 17.7%
Interest (net) 4,664 4,923 5.6% 9,924 12,524 26.2%
Depreciation 4,596 4,933 7.3% 14,033 15,503 10.5%
Profit before tax 20,525 24,138 17.6% 14,760 16,861 14.2%
Extraordinary income/(expense) 0 7,880 NM 178 (2,625) NM
Tax 6,964 9,337 34.1% 3,514 10,804 207.5%
Profit after tax/(loss) 13,561 22,680 67.2% 11,423 3,432 -70.0%
Minority interest 0 0   29 (144) NM
Share of profit of associates 0 0   (62) 86 NM
PAT after minority and sh. of assoc. profit 13,561 22,680 67.2% 11,390 3,373 -70.4%
Net profit margin (%) 14.3% 21.7%   3.5% 0.9%  
No. of shares (m)   971        
Diluted earnings per share (Rs)$   23.3        
Price to earnings ratio (x)*   7.2        
(* trailing 12 months earnings)

What has driven performance in 1QFY15?
  • The group's steel deliveries increased by 6% YoY to 6.46 MT (million tonnes) in 1QFY15. The India and European deliveries stood at 2.1 MT and 3.2 MT respectively. With the exception of industrial products, all sub-segments in India namely branded products and automotive registered strong volume growth.

  • The EBITDA per ton increased 8.4% YoY to Rs 6,699 per ton in 1QFY15. The EBITDA per ton from the Indian operations stood at Rs 15,529 during the quarter.

  • Tata Steel's consolidated underlying debt stood at Rs 677.28 bn in 1QFY15. The company incurred a total capex of Rs 30.5 bn in 1QFY15.

  • The mining issue in Odisha has been partially resolved as the company has got permission from the concerned state government to mine iron ore and manganese. However, operations in the Khondbond mine and Sukinda Chromite mine still stand suspended.

  • The operations in the South East Asia seem to be improving due to tight working capital management, strategy to focus on export markets and cost reduction initiatives taken by the company.
What to expect?
At the current price of Rs 537, the stock is trading at a multiple of 7.2x its standalone trailing twelve month earnings. Management expects the European operations to revive though the demand was below expectations in the recent quarter. The company has been focusing on cutting costs and selling high margin products to boost sales in Europe where demand is in virtual stagnation.

While the domestic business has been doing well it has been impacted by the bans on iron ore mining. During the quarter, mining operations from one of its mines were suspended for 15 days though this did not impact the deliveries that much.

All in all, despite an improvement in European operations, the high net debt situation with ongoing capex and very limited scope of deleveraging would continue to be an overhang on the stock performance. We are in the process of reviewing our FY17 estimates and shall update the subscribers about our revised view soon.

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