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Tata Steel: A disappointing quarter

Aug 16, 2012

Tata Steel has announced its June quarter (1QFY13) results. On a consolidated basis the company has reported a 2.5% YoY growth in topline and 89% YoY decline in net profits. Here is our analysis of the results.

Performance summary
  • Consolidated topline grew by a meagre 2.5% YoY during the quarter ended June 30, 2012.
  • Consolidated operating profit was down by 23.6% YoY while the operating margins reduced by nearly 3.5%.
  • On a standalone basis, the company reported an increase of 13.3% YoY in sales and operating profits were down by 10.75% YoY.
  • Interest expenses on consolidated basis fell by 4.3% YoY while for the standalone entity, the same registered a slight increase of 0.17% YoY.
  • Net profit on consolidated basis was down by 89% YoY while the same for the standalone entity was down by 39% YoY.

Standalone financial performance
  Standalone results Consolidated results
(Rs m) 1QFY12 1QFY13 Change 1QFY12 1QFY13 Change
Net sales 78,603 89,080 13.33% 330001.7 338212 2.49%
Expenditure 47,454 61,282 29.14% 285429.4 304179.2 6.57%
Operating profit (EBITDA) 31,148 27,798 -10.75% 44,572 34,033 -23.65%
EBDITA margin (%) 39.63% 31.21% -21.25% 13.51% 10.06% -25.50%
Other income 2,564 1,519 -40.75% 7612.5 2893.8 -61.99%
Interest (net) 4,537 4,544 0.17% 10129.5 9690.1 -4.34%
Depreciation 2,853 3,544 24.22% 11507.9 13079.8 13.66%
Profit before tax 26,322 21,229 -19.35% 30,547 14,157 -53.66%
Extraordinary income/(expense) 5110.1 0   33,619 0  
Tax 9,238 7,663.20 -17.05% 11229.9 8986.3 -19.98%
Profit after tax/(loss) 22,194 13,566 -38.88% 52,937 5,170 -90.23%
Minority interest 0 0   248.1 398.9  
Share of profit of associates 0 0   280.7 409.5  
PAT after minority and sh. of assoc. profit 22,194 13,566 -38.88% 53,466 5,979 -88.82%
Net profit margin (%) 28.24% 15.23% -46.07% 16.20% 1.77% -89.09%
No. of shares (m) 959 971   959 971  
Diluted earnings per share (Rs)*   60.05     74.21  
Price to earnings ratio (x)*   6.63     5.36  
* On a trailing 12-months basis

What has driven performance in 1QFY13?
  • Tata Steel reported a 2.5% YoY growth in topline on a consolidated basis and 13.3% YoY growth in topline on a standalone basis during 1QFY13. This was due to lower demand in European and Indian operations. Operating margins at the consolidated level saw a decline of 3.5% YoY and at the standalone level saw a decline of 8.4% YoY.

    Cost break-up
      Standalone results Consolidated results
    (Rs m) 1QFY12 1QFY13 Change 1QFY12 1QFY13 Change
    Raw materials consumed 15729 20031 27.4% 151869 150498 -0.9%
    % sales 18.9% 21.1%   44.9% 44.3%  
    Staff cost 6870 8591 25.1% 42316 47825 13.0%
    % sales 8.2% 9.1%   12.5% 14.1%  
    Purchase of power 4593 5478 19.3% 12093 13906 15.0%
    % sales 5.5% 5.8%   3.6% 4.1%  
    Freight and handling 4064 4819 18.6% 16170 17358 7.3%
    % sales 4.9% 5.1%   4.8% 5.1%  
    Other expenditure 16198 22363 38.1% 62982 74593 18.4%
    % sales 19.4% 23.6%   18.6% 21.9%  

  • Net profits on a consolidated basis saw a decline of 88.8% YoY on account of high raw material cost and lower demand in Europe. Net profit margins on a consolidated and standalone basis declined by 13% YoY and 14.4% YoY respectively. The Group's steel deliveries in 1QFY13 declined by 6.6% to 5.68 m tonnes compared to 6.05 m tonnes in 1QFY12.

  • On the domestic front, Tata Steel's operating profit declined by 10.8% YoY. Realization was up 5% QoQ but volumes were down 10%. The company was impacted on four counts with regard to costs: 1) Employee cost for the quarter was higher by Rs 960 m due to an additional provision for gratuity consequent to drop in interest rates. 2) Power shortage at its downstream facilities resulted in a production loss of 40,000 tonnes. 3) The company imported 207,000 tonnes of coke, but imports would stop in 3QFY13 on commissioning of its new coke oven plant. 4) Forex loss due to Rupee depreciation amounted to Rs 2.05 bn, including loss on raw material payables of Rs 700 m.

  • European revenue was at Rs 204 bn (3% increase QoQ) with steel sale deliveries at 3.2 mt (down 10% QoQ). Corus EBITDA/ton surprised positively at USD $35/ton (USD $7/ton in 4QFY12) with Corus EBITDA at Rs 6.2 bn. The management expects 2HFY13 to be better operationally as various cost reduction initiatives and restructuring efforts start to pay off.

  • Deliveries of South East Asian operations declined by 0.8% to 0.72 mt in 1QFY'13 compared to the 0.73 mt in 4QFY'12 and by 7.7% from the 0.78 mt in 1QFY'12. Turnover at Tata Steel South East Asia was USD $606 m (up by 1.2% from USD $599 m in 1QFY12). EBITDA in 1QFY13 was up by 1.2% YoY. However EBITDA margin declined slightly on a sequential basis.

  • Tata Steel's net debt increased to USD $9.7 bn from USD $8.6 bn at the end of March 2012 (Gross debt increased from USD $10.7 bn to USD $11.7 bn). The company attributed the increase to: 1) capex of USD $641 m in 1QFY13 (for the full year, the target capex is USD $2-2.3 bn), and 2) revaluation impact of USD $482 m. The company generated consolidated cash flow of close to USD $500 m and a net debt increase of USD $1.1 bn, so a combination of the above three factors explain the total cash outflow.

What to expect?
Tata Steel has started the blast furnace (BF) operations - the new blast furnace produced close to 0.6 m tonnes during 1QFY13. However, this was masked by maintenance shutdown at older BF and hence there is no perceptible increase in hot metal production. The company has said that this was deliberate given coke oven batteries have not yet been commissioned and this should be completed by 3QFY13. The company maintained its guidance of a 1m tonne increase in volumes in FY13.

Overall, the company has managed to maintain the profitability of its Indian operations while even its European operations have reported credible performance. While the European operations would likely remain under pressure in the near term, we expect things to improve gradually with: 1) cost benefits of the Port Talbot BF rebuild and 2) a fall in raw material costs to help maintain contribution margins.

We believe that current valuations are already factoring in most of the concerns over Europe and the ramp up of domestic volumes from the 3 mtpa expansion would drive the profit growth going ahead. At the current price of Rs 390, the stock trades at a multiple of 7.1 times its TTM P/E on a consolidated basis. We maintain our positive view on the stock from a long term perspective.

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