Efficiency and productivity are the way forward - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks

MEMBER'S LOGINX

     
Login Failure
   
     
   
     
 
 
 
(Please do not use this option on a public machine)
 
     
 
 
 
  Sign Up | Forgot Password?  

Efficiency and productivity are the way forward

Oct 21, 2000

The old economy has all but been written off by investors. Valuations have been torpedoed by those who are increasingly looking for growth, whether it be backed by profitability or not. In all this talk about high tech stocks and investment opportunities, some old economy companies have been consistently outperforming the most optimistic of expectations. Undoubtedly, leading this pack is Tata Iron and Steel Company Limited (Tata Steel), India's largest private sector integrated steel producer. Productivity and efficiency have been given a new meaning by this company, which until the late 1980s and early 1990s was a typical example of vintage corporate India, characterized by its large employee base and production driven approach. Today, the company is near striking distance of becoming the most cost efficient producer of Hot Rolled Coils (a form of saleable steel) in the world. This has been achieved by a dramatic reduction in costs of production, achieved mainly by improving technology and a reduction in the employee base from a 78,669 to 50,915 employees presently. The company’s successful attempt at becoming more efficient is clearly evident from its results for the quarter ended 30th September 2000.

During the quarter the company posted a 9.5 percent rise in revenues despite the fact that volume growth was negligible (the company is operating at over 100 percent capacity levels). Thus, growth came largely from higher realisations. On a net basis Tata Steel saw its bottomline grow 76 percent. However, if one were to exclude the impact of extraordinary items, the growth in earnings was in excess of 180 percent! And there’s more to come.

(Rs m) 2QFY00 2QFY01 Change
Sales 17,075 18,703 9.5%
Other Income 126 207 64.2%
Expenditure 14,327 14,414 0.6%
Operating Profit (EBDIT) 2,748 4,289 56.1%
Operating Profit Margin (%) 16.1% 22.9%  
Interest 837 684 -18.4%
Depreciation 1,060 1,146 8.1%
Profit before Tax 976 2,667 173.1%
Other Adjustments (248) -1,428  
Tax 75 89 18.4%
Profit after Tax/(Loss) 654 1,150 75.9%
Net profit margin (%) 5.3% 13.8%  
No. of Shares (eoy) 368.4 368.4  
Diluted Earnings per share#* 7.10 12.49 75.9%
*(annualised)      

In August, the company commissioned its 1.2 million tonnes per annum cold roll mill (CR mill) (needless to say that the company has executed the project in a time and at a cost that have set new international bench marks). With full capacity expected to be achieved within 13 months, the CR mill will add significant value to the product mix. This will further benefit Tata Steel in terms of margins and realisations. Tata Steel is clearly having one of its best years ever.

  

The stock markets have however failed to take note of this change. The stock, which has responded to the positive results, continues to trade close to its yearly lows.

Not that there is no reason at all to be bearish on the stock. Profits, in the long term, cannot continue to outpace revenue growth. That's the key concern with Tata Steel, which is already operating at full capacity. The company needs to step up capacity, as commodities after all are volume plays. Although the company has acknowledged that it is looking at some units for the purpose of acquisition, there is no indication of a time frame. This is likely to weigh on the stock, as without volume growth, it would amount to banking on the prospect that steel prices would continue to rise (thus driving Tata Steel's profits and revenues). And that seems unlikely. Indeed, global steel prices have already softened in recent months.

Also there are concerns regarding the domestic demand supply position. Already, the company is experiencing a slowdown in demand for ‘longs’ (largely used in construction) in view of the overall economic slowdown. Realisations in case of ‘flats’ are likely to come under pressure on account of large domestic capacities going on stream in recent months. Until recently, the export markets acted as a vent in such a situation. However, in view of the developments pertaining to dumping duties imposed by some countries on select Indian steel products, a situation of a domestic over-supply is likely to suppress realisations. Also, falling international steel prices have encouraged producers to tap the less volatile domestic markets.

Tata Steel has definitely come a long way in the last decade. It has evolved into a modern steel-making unit, capable of competing with the best in international markets. The company’s financial performance only underscores this. However, the company today faces a great challenge: that of increasing its size by either building or acquiring capacities.


Equitymaster requests your view! Post a comment on "Efficiency and productivity are the way forward ". Click here!

  

More Views on News

TATA STEEL 2019-20 Annual Report Analysis (Annual Result Update)

Aug 7, 2020 | Updated on Aug 7, 2020

Here's an analysis of the annual report of TATA STEEL for 2019-20. It includes a full income statement, balance sheet and cash flow analysis of TATA STEEL. Also includes updates on the valuation of TATA STEEL.

TATA STEEL 2018-19 Annual Report Analysis (Annual Result Update)

Sep 9, 2019 | Updated on Sep 9, 2019

Here's an analysis of the annual report of TATA STEEL for 2018-19. It includes a full income statement, balance sheet and cash flow analysis of TATA STEEL. Also includes updates on the valuation of TATA STEEL.

TATA STEEL Announces Quarterly Results (1QFY20); Net Profit Down 66.7% (Quarterly Result Update)

Aug 8, 2019 | Updated on Aug 8, 2019

For the quarter ended June 2019, TATA STEEL has posted a net profit of Rs 6 bn (down 66.7% YoY). Sales on the other hand came in at Rs 359 bn (down 5.0% YoY). Read on for a complete analysis of TATA STEEL's quarterly results.

TATA STEEL Announces Quarterly Results (4QFY19); Net Profit Down 84.2% (Quarterly Result Update)

Apr 26, 2019 | Updated on Apr 26, 2019

For the quarter ended March 2019, TATA STEEL has posted a net profit of Rs 23 bn (down 84.2% YoY). Sales on the other hand came in at Rs 424 bn (up 17.4% YoY). Read on for a complete analysis of TATA STEEL's quarterly results.

More Views on News

Most Popular

My Top Stock to Buy in this Market Selloff (Profit Hunter)

Sep 22, 2020

The recent correction offers a great opportunity to buy this high conviction smallcap stock.

Can the Nifty Fall to 10,200? (Fast Profits Daily)

Sep 24, 2020

The Nifty has reached an important support level today. If it breaks then we could see further downside.

I Believe These Stocks Will Deliver the Most Outsized Returns in 2021 and Beyond (Profit Hunter)

Sep 23, 2020

Rules of the racetrack can help you bag the biggest gainers of the coming decade.

What Do the Charts Say About Buying Smallcaps Now? (Fast Profits Daily)

Sep 18, 2020

Everyone seems to be excited about buying smallcaps now...but is it the right thing to do? What do the charts tell us? Find out in this video...

More

Covid-19 Proof
Multibagger Stocks

Covid19 Proof Multibaggers
Get this special report, authored by Equitymaster's top analysts now!
We will never sell or rent your email id.
Please read our Terms

TATA STEEL SHARE PRICE


Oct 1, 2020 02:35 PM

TRACK TATA STEEL

  • Track your investment in TATA STEEL with Equitymaster's Portfolio Tracker. Set live price alerts, get research alerts and more. Get access now...
  • Add To MyStocks

TATA STEEL - JAI CORP LTD COMPARISON

COMPARE TATA STEEL WITH

MARKET STATS