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Tata Steel: Home and abroad - Views on News from Equitymaster

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Tata Steel: Home and abroad

Oct 4, 2010

In a previous article, we pointed out how the fortune of the world steel industry is now sharply divided. On the one hand, we have the developed economies. As they struggle to take off after the financial meltdown, their steel industry is facing sluggish demand. Contrast that with the emerging nations. The steel industry in the BRIC nations and even the Middle East is far better off. This conclusion can be drawn from country-level data, which we examined in the earlier article.

The divided fortunes of the world steel industry
Particulars FY08 FY09 FY10
Tata Steel India
Volumes (m tonnes) 4.8 5.2 6.2
EBITDA (Rs/Tonne) 16,677 16,912 14,729
EBITDA margin 41% 36% 36%
Tata Steel Europe
Volumes (m tonnes) 23.0 19.0 14.2
EBITDA (Rs/Tonne) 3,279 5,663 (908)
EBITDA margin 8% 10% -2%
Nat Steel
Volumes (m tonnes) 2.4 2.4 2.4
EBITDA (Rs/Tonne) (729) 1,241 2,316
EBITDA margin -2% 3% 9%
Volumes (m tonnes) 1.4 1.1 1.2
EBITDA (Rs/Tonne) 3,539 2,991 108
EBITDA margin 12% 8% 0%
Source: Company, Equitymaster Research
Note: Certain cost items could not be allocated with precision due to lack of details.

Interestingly, even if we look at the micro-level, the sharp divide is apparent. Take Tata Steel for instance. As can be seen from the table, the contrast in performance of their Indian operations vs. their European operations is chalk and cheese. And this difference is at the variable cost level. Hence, it keeps aside factors like high-cost facilities and interest cost on debt. The far superior operating margins of the Indian operations can be explained by both strong realisations (due to strong demand) as well as low-cost production of hot metal (due to captive mines for key raw materials).

Some useful conclusions can be drawn from this data. Indian steel companies which are expanding capacity in India are looking at much better economics. Contrast that with Tata Steel, whose inorganic growth through the acquisition of Corus, has left it in a tight spot. The company will have to ensure that synergies kick in. It will also have to successfully apply Corus' downstream technology in value-added products to its India operations. Certainly a more challenging management task than growing solely within India and letting the superior economics do the trick.

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