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Tata Steel: Defying the trend - Views on News from Equitymaster
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Tata Steel: Defying the trend
Oct 24, 2008

Performance summary
  • Standalone topline grows by 43% YoY during 2QFY09, helped mainly by higher realizations and a lower rupee

  • Expenses grow at a lower rate than topline, resulting into a strong EBITDA margin expansion of 520 basis points (5.2%).

  • Bottomline growth comes in at 50% YoY during the quarter, led by higher margins and other income. Excluding extraordinary, it shows a very strong jump of 94% YoY

  • Half yearly bottomline grows by 36% YoY on the back of a 45% growth in topline



(Rs m) 2QFY08 2QFY09 Change 1HFY08 1HFY09 Change
Steel sales (000' tonnes) 1,218 1,220 0.1% 2,259 2,380 5.3%
Net sales 47,249 67,442 42.7% 88,566 128,343 44.9%
Expenditure 28,159 36,677 30.2% 53,689 68,082 26.8%
Operating profit (EBDITA) 19,089 30,765 61.2% 34,877 60,261 72.8%
EBDITA margin (%) 40.4% 45.6% 39.4% 47.0%
Other income 1,416 3,449 143.6% 3,151 4,320 37.1%
Interest (net) 1,892 2,548 34.7% 2,308 4,966 115.2%
Depreciation 2,050 2,488 21.4% 4,163 4,656 11.9%
Profit before tax 16,563 29,177 76.2% 31,558 54,960 74.2%
Extraordinary income/(expense) 903 (3,454) 4,933 (6,488)
Tax 5,558 7,845 41.1% 12,362 15,709 27.1%
Profit after tax/(loss) 11,908 17,878 50.1% 24,129 32,762 35.8%
Net profit margin (%) 25.2% 26.5% 27.2% 25.5%
No. of shares (m) 609.2 730.8 609.2 730.8
Diluted earnings per share (Rs)* 76.0
Price to earnings ratio (x)* 2.3
( * on trailing twelve months earnings)

What has driven performance in 2QFY09?
  • Allaying slowdown fears, Tata Steel has reported a strong 43% YoY growth in topline during the quarter. Almost all the growth has come from improved product mix and better realisations, as the volumes growth remained flat. The fact that the rupee edged lower also helped matters as it was able to increase its exports turnover by a healthy 85% YoY over the corresponding previous quarter. In the domestic markets, it was the ferro alloys segment that emerged the star performer with more than two fold jump in revenues. As far as the outlook for the rest of the year is concerned, while the company expects prices to cool off in the region of 8%-10%, it does not foresee a significant drop in volumes.

    Cost break-upÖ
    (Rs m) 2QFY08 2QFY09 Change 1HFY08 1HFY09 Change
    Raw materials 8,769 11,179 27.5% 16,153 20,556 27.3%
    % sales 18.6% 16.6% 18.2% 16.0%
    Staff cost 4,334 5,985 38.1% 8,644 10,704 23.8%
    % sales 9.2% 8.9% 9.8% 8.3%
    Freight and handling 2,907 3,315 14.0% 5,469 6,356 16.2%
    % sales 6.2% 4.9% 6.2% 5.0%
    Purchase of power 2,387 2,781 16.5% 4,715 5,400 14.5%
    % sales 5.1% 4.1% 5.3% 4.2%
    Other expenses 9,763 13,418 37.4% 18,709 25,066 34.0%
    % sales 20.7% 19.9% 21.1% 19.5%

  • A ruthless focus on cost cutting has seen Tata Steel improve its margins by a strong 5.2% over 2QFY08. Almost all the cost heads have grown at a lower rate than the topline. With prices of key raw materials on the wane, margins are likely to receive further boost over the next couple of quarters.

  • Tata Steelís other income has witnessed a strong growth of 144% YoY, attributed largely to the profits from transfer of stake in Tata Steel (Thailand) to Tata Steel Global Holdings. However, it has been more than offset by a translational forex loss to the tune of Rs 3.5 bn, thus restricting the bottomline growth to 50% YoY, slightly lower than the 61% growth in operating profits. Growth in interest and depreciation charges has remained benign.

What to expect?
At the current price of Rs 177, the stock is trading at a multiple of 0.3 times our estimated FY11 book value per share. Although there has been a lot of concern in the market with respect to Corus operations, we have already been conservative in our valuation of the company and hence, do not feel the need to revisit our numbers on that front. Projections on the domestic side though need to be revised downwards a bit. Having said that, we remain positive on the stock from a medium term perspective. We will come out with an updated research report shortly.

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