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Tata Steel: Lower steel prices take toll - Views on News from Equitymaster

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Tata Steel: Lower steel prices take toll
Oct 27, 2009

Performance summary
  • Standalone topline declines by 16.5% YoY during 2QFY10 mainly due to lower steel prices, while volumes grow by 19.2% YoY during the quarter.
  • Operating margins slump 12.6% YoY to 33% in 2QFY10 on the back of decline in operating profits by 39.5% YoY during the quarter.
  • Bottomline declines by 49.5% YoY in 2QFY10, higher than the operating profits mainly on account of higher interest cost and lower other income during the quarter.
  • Half yearly bottomline declines by 48.3% YoY on the back of a 12.9% decline in the topline.


(Rs m) 2QFY09 2QFY10 Change 1HFY09 1HFY10 Change
Steel sales (000' tonnes) 1,220 1,454 19.2% 2,380 2,875 20.8%
Net sales 67,442 56,299 -16.5% 128,343 111,839 -12.9%
Expenditure 36,677 37,699 2.8% 68,082 76,432 12.3%
Operating profit (EBDITA) 30,765 18,600 -39.5% 60,261 35,407 -41.2%
EBDITA margin (%) 45.6% 33.0%   47.0% 31.7%  
Other income 3,449 1,383 -59.9% 4,320 2,462 -43.0%
Interest (net) 2,548 3,920 53.8% 4,966 7,342 47.9%
Depreciation 2,488 2,564 3.0% 4,656 5,095 9.4%
Profit before tax 29,177 13,499 -53.7% 54,960 25,431 -53.7%
Extraordinary income/(expense) (3,454) -   (6,488) -  
Tax 7,845 4,470 -43.0% 15,709 8,504 -45.9%
Profit after tax/(loss) 17,878 9,029 -49.5% 32,762 16,928 -48.3%
Net profit margin (%) 26.5% 16.0%   25.5% 15.1%  
No. of shares (m) 730.8 730.8   730.8 887.4  
Diluted earnings per share (Rs)*         58.8  
Price to earnings ratio (x)*         8.5  
( * on trailing twelve months earnings)

What has driven performance in 2QFY10?
  • Standalone topline of the company declined by 16.5% YoY in 2QFY10 mainly on account of lower realisations due to lower steel prices during the quarter. While on a YoY basis, Steel HRC prices during the quarter were lower by 25%, the same have increased by around 6% on a QoQ basis. Furthermore, sales volumes grew by a robust 19.2% to 1.42 m tonnes on account of improved demand.

  • Operating profits declined by 39.5% YoY, greater than the topline mainly on account of higher operating costs led by raw material costs. Raw material costs (as % of sales) grew significantly due to coal that was contracted at higher prices last year. Furthermore other cost head like power, freight and other expenses (as % of sales) have increased during the quarter. Thus, EBITDA margins declined from 45.6% in 2QFY09 to 33% in 2QFY10.

    Cost breakup>
    (Rs m) 2QFY09 2QFY10 Change 1HFY09 1HFY10 Change
    Raw materials 11,179 14,217 27.2% 20,556 30,273 47.3%
    % sales 16.6% 25.3%   16.0% 27.1%  
    Staff cost 5,985 5,221 -12.8% 10,704 10,283 -3.9%
    % sales 8.9% 9.3%   8.3% 9.2%  
    Freight and handling 3,315 3,078 -7.1% 6,356 6,231 -2.0%
    % sales 4.9% 5.5%   5.0% 5.6%  
    Purchase of power 2,781 2,979 7.1% 5,400 6,262 16.0%
    % sales 4.1% 5.3%   4.2% 5.6%  
    Other expenses 13,418 12,204 -9.0% 25,066 23,383 -6.7%
    % sales 19.9% 21.7%   19.5% 20.9%  

  • Tata Steelís standalone bottomline declined by 49.5% YoY, higher than the operating profits mainly due higher interest cost and lower other income. Moreover, increase in the depreciation cost also impacted the bottomline negatively. However, decline in the tax outgo limited the decline in the bottomline.

What to expect?
At the current price of Rs 470, the stock is trading at a multiple of 0.8 times our expected FY12 book value per share. Although the performance of the company has come in below our expectations, it will not significantly affect our medium term price target as we use asset based valuation method of book value. We remain positive on the company from a long-term perspective.

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