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Tata Steel: Deferred taxes boost bottomline
Aug 16, 2013

Tata Steel has announced its June quarter (1QFY14) results. On a consolidated basis the company has reported a 3% YoY decline in topline and 90.5% YoY increase in net profits. Here is our analysis of the results.

Performance summary
  • Consolidated topline declined by 3% YoY during the quarter ended June 30, 2013.
  • Consolidated operating profit was down by 4.3% YoY while the operating margins improved by 1.1%.
  • On a standalone basis, the company reported an increase of 6.1% YoY in sales and operating profits were up by 2% YoY.
  • Interest expenses on consolidated basis increased by 2.4% YoY while for the standalone entity, the same registered an increase of 2.6% YoY.
  • Net profit on consolidated basis was up by 90.5% YoY while the same for the standalone entity remained flat YoY.

Financial Performance
  Standalone results Consolidated results
(Rs m) 1QFY13  1QFY14 Change 1QFY13  1QFY14 Change
Net sales 89,080 94,554 6.1% 338212 328048 -3.0%
Expenditure 61,282 66,211 8.0% 304179 291168 -4.3%
Operating profit (EBITDA) 27,798 28,343 2.0% 34,033 36,880 8.4%
EBDITA margin (%) 31.2% 30.0%   10.1% 11.2%  
Other income 1,519 1,442 -5.1% 2894 1836 -36.5%
Interest (net) 4,544 4,664 2.6% 9690 9924 2.4%
Depreciation 3,544 4,596 29.7% 13080 14033 7.3%
Profit before tax 21,229 20,525 -3.3%     14,157 14,760 4.3%
Extraordinary income/(expense) 0 0     178  
Tax 7,663 6,964.10 -9.1% 8986 3514 -60.9%
Profit after tax/(loss) 13,566 13,561 0.0% 5,170 11,423 120.9%
Minority interest 0 0   399 29 -92.7%
Share of profit of associates 0 0   410 -62 -115.2%
PAT after minority and sh. of assoc. profit 13,566 13,561 0.0% 5,979 11,390 90.5%
Net profit margin (%) 15.2% 14.3%   1.8% 3.5%  
No. of shares (m)   971        
Diluted earnings per share (Rs)*   52.1        
Price to earnings ratio (x)*   4.6        
(* trailing 12 months earnings)

What has driven performance in 1QFY14?
  • Tata Steel reported a 3% YoY decline in topline on a consolidated basis and 6.1% YoY growth in topline on a standalone basis during 1QFY14. This was due to strong performance in European and Indian operations. Operating margins at the consolidated level saw an improvement of 1.1% YoY and at the standalone level saw a decline of 1.2% YoY.

    Cost break-up
      Standalone results Consolidated results
    (Rs m) 1QFY13 1QFY14 Change 1QFY13 1QFY14 Change
    Raw materials consumed 20031 21191 5.8% 150498 131786 -12.4%
    % sales 22.5% 22.4%   44.5% 40.2%  
    Staff cost 8591 10028 16.7% 47825 47912 0.2%
    % sales 9.6% 10.6%   14.1% 14.6%  
    Purchase of power 5478 6525 19.1% 13906 14634 5.2%
    % sales 6.1% 6.9%   4.1% 4.5%  
    Freight and handling 4819 6348 31.7% 17358 19853 14.4%
    % sales 5.4% 6.7%   5.1% 6.1%  
    Other expenditure 22363 22118 -1.1% 74593 76983 3.2%
    % sales 25.1% 23.4%   22.1% 23.5%  

  • Net profits on a consolidated basis increased by 90.5% YoY on account of better cost control efforts at the European operations. Net profit margins on a consolidated basis improved by 1.7% YoY and on standalone basis it declined by 0.9% YoY respectively. The Group's steel deliveries in 1QFY14 declined by 7.9% to 6.08 m tonnes compared to 6.56 m tonnes in 1QFY13.

  • On the domestic front, Tata Steel's Indian operations posted a net sales growth of 6.1% YoY mainly due to increase in volumes, although the same was partially offset by decline in realizations. Volumes increased by 26.4% YoY to 2 m tonne and net steel realizations declined by 13.4% YoY to Rs 44,607/tonne. Tata Steel's India operations' EBITDA grew by only 2% YoY and EBITDA margin slipped 123 basis points YoY due to rising costs of freight, power and fuel. The EBITDA/tonne decreased by 19.6% YoY. The other income for the quarter decreased by 5.1% YoY depreciation charges increased by 29.7% YoY due to capitalization of 2.9 m tonne brownfield expansion at Jamshedpur. Hence, the standalone PAT was flat YoY.

  • Tata Steel Europe (TSE)'s volumes declined by 2.2% YoY to 3.1m tonne. However, it reported an EBITDA/tonne of US $44 compared to US $36 in 1QFY13 due to better cost control efforts at the European operations. The consolidated EBITDA increased by 8.4% YoY. The company's tax expenses declined 60.9% YoY due to benefits of deferred taxes in the European operations; hence the adjusted net profit grew by 90.5% YoY.

  • Tata Steel Asia reported EBITDA of Rs 930 m (down Rs 1.2 bn QoQ), even as deliveries were up 60 kt QoQ at 0.86 m tonnes. Production declined 10% QoQ to 0.61 m tonnes, on a two-month shutdown for a planned upgrade in Singapore. Management indicated that margins were impacted by the narrowing of spreads in the quarter. However, they highlighted that strong demand in the region and ramp up of China operations should improve performance going forward.

  • While the company has significantly cut down on discretionary capex, total capex in FY14/15E would remain US $2.5 bn per annum, which would largely be spent on Orissa project. Capex incurred during the quarter was Rs 37.6 bn, out of which about Rs 20 bn was spent on the Orissa project. Now almost Rs 95 bn of the intended Rs 230 bn capex (earlier guidance of Rs 185 bn) has been spent on Phase I of the Orissa project. Of the total project debt of Rs 125 bn (for Phase I), nothing has been drawn so-far, which will start from Nov-13, as capex intensity increases. The company is not looking to spend anything on Phase II of this project before completion of Phase I and before evaluating demand conditions and its own long-term strategy, which we believe is positive.
What to expect?
According to the management, macroeconomic indicators continue to remain weak in Europe. However construction sector is showing signs of improvement. While production increased significantly we remain cautious on higher inventory built-up. In addition, June is seasonally the strongest quarter in Europe and hence the profitability cannot be extrapolated. Moreover, we believe the profitability upbeat was partially led by lag effect of lower raw material prices, which will reverse in subsequent quarters, given the increase in iron ore costs. Indian operations' profitability is driven by captive iron ore, and as such the recent rise in iron ore price to well above US $140/t is very encouraging.

We maintain our positive stance on Tata Steel owing to its buoyant business outlook, driven by a) higher sales volume in FY2014-15 on the back of 2.9 m tonne brownfield expansion project in Jamshedpur, b) raw-material projects at Mozambique and Canada and c) restructuring initiatives at TSE. At the current price of Rs 242, the stock trades at a multiple of 4.6 times its TTM P/E on a standalone basis. We maintain our Buy view on the stock from a long term perspective.

We would like to gently remind you that your allocation to equities should be decided upon after keeping aside some safe cash. Also within your overall exposure to equities please ensure that you broadly follow our suggested asset allocation and that no single stock comprises more than 5% of your portfolio.

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