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Tisco: Focusing on value

Sep 13, 2002

Tata Steel (Tisco), India’s premier private sector steel company, has been undergoing a significant change over the last few months. The company, which is one of the lowest cost steel producers in the world, is now leveraging its cost structure by moving into value added products. The benefits of this coupled with higher price realizations are expected to bring in an unprecedented earnings growth for the company in FY03. Global hot rolled (HR) steel prices have rebounded sharply to US$ 280 currently, from an average US$ 210 (up by over 30%) in FY02. This rise is on the back of supply side constraints (mainly from Korea and Japan) and signs of a global economic recovery. Tisco has already increased its product prices by around Rs 3,000 – Rs 3,500 per tonne since April 2002, which would sharply improve realizations in the current fiscal.

To take better advantage of higher price realizations, Tisco is gradually increasing the proportion of value added cold rolled (CR) products. Price realization on CR steel is about 20%-25% higher than HR steel and is double that of semi finished steel. Apart from better sales realization, over 80% capacity utilization of cold rolled (CR) products from next year onwards would also push up the company’s volume growth. The company’s domestic market share in CR steel has already increased to 27% in June 2002 from 21% in FY02. Change in the sales value mix is likely to help company in maintaining its operating margins at higher levels.

Sales mix
Particulars FY01 FY02 FY03E
HR 46% 38% 32%
CR 19% 29% 35%
Semis 19% 13% 6%
Long 16% 19% 27%
Source: Tisco

Apart from better sales realizations, Tisco would also reap the benefits of its cost reduction efforts. The company has been focusing on curtailing its employee costs, which formed 16% of total revenues in FY02. Through VRS Tisco has reduced the number of employees to 46,000 in FY02 from 65,000 in FY98. For FY03, the company expects the number of employees to come down further by around 3,000. Power is the other major cost component (10% of revenues), which is expected to decline in the coming years. With full capacity utilization of power from its group company Tata Power, cost per unit of power would reduce gradually in the coming years. The cumulative effect of higher price realizations, change in product mix and cost control measures would be reflected in Tisco’s operating margins in the coming years (FY03 projection at 22%).

At the current market price of Rs 121, Tisco is trading at a P/E multiple of 11x FY03 projected earnings. The company is projected to report nearly triple digit growth in profits in FY03. In the last five years, Tisco has traded in the average P/E range of 8-22 times. Despite better earnings prospects, the stock is lacking buying interest due to concerns over the company’s diversification plans.

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