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Tisco: 全teel段ng the show - Views on News from Equitymaster
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  • Oct 30, 2003

    Tisco: 全teel段ng the show

    Tisco, India痴 largest private sector steel company has reported a robust growth in topline as well as bottomline for the second quarter ended September 2003. While the topline has grown by 26%, the bottomline has more than doubled (up 101%). Operating margins that currently rest at 29%, have also showed a good improvement of 260 basis points. The 1HFY04 performance of the company has been even more impressive with topline and bottomline growth of 27% and 153% respectively. Operating margins during the first half of the fiscal have improved by a strong 670 basis points. The 1HFY04 performance has been enhanced owing to a splendid performance during the June quarter (1QFY04) of the current fiscal. Stronger steel prices and control on expenditure have aided the improvement in margins.

    (Rs m) 2QFY03 2QFY04 Change 1HFY03 1HFY04 Change
    Net Sales 20,788 26,130 25.7% 38,438 48,701 26.7%
    Other Income 144 564 291.6% 254 744 193.5%
    Expenditure 15,533 18,566 19.5% 29,710 34,386 15.7%
    Operating Profit (EBDIT) 5,255 7,564 43.9% 8,728 14,315 64.0%
    Operating Profit Margin (%) 25.3% 28.9%   22.7% 29.4%  
    Interest 813 570 -29.9% 1,666 1,335 -19.9%
    Depreciation 1,405 1,470 4.7% 2,790 2,916 4.5%
    Profit before Tax 3,182 6,087 91.3% 4,525 10,809 138.8%
    Extraordinary items (857) (16)   (1,480) (727)  
    Tax 318 2,040 541.5% 396 3,380 753.2%
    Profit after Tax/(Loss) 2,007 4,031 100.9% 2,649 6,702 153.0%
    Net profit margin (%) 9.7% 15.4%   6.9% 13.8%  
    No. of Shares 368.0 369.2   368.0 369.2  
    Diluted Earnings per share*   43.7     36.3  
    P/E Ratio         9.6  
    (* annualised)            

    The strong topline growth can be attributed to the sharp increase in volume sales, which were up by 11% in 2QFY04 over the corresponding last year. Complementing the volume growth of Tisco were the strengthening steel prices, which were ruling higher by an average 10% YoY. The demand for steel was a factor of the infrastructure initiatives undertaken by the government, like the golden quadrilateral and also the simultaneous boom being witnessed in the housing sector. Moreover, strong international demand for steel has kept the steel prices ticking.

    Surprisingly, exports showed a negative 3% growth in the second quarter. This seems a likely effect of reduced exports to the US and China, the latter being one of the major consumers of steel in recent times. It must be noted that both these countries had issued warnings to India to keep a check on their exports to these countries in order to avoid tariffs being imposed on their steel products. However, despite the September quarter showing a dip in exports, the exports during 1HFY04 were higher by 27% YoY on the back of a 76% growth in exports during the first quarter of the current fiscal.

    The other income component had an important role to play in propping up the bottomline of Tisco. While other income for 2QFY04 was higher by a whopping 292%, for the 1HFY04, it was higher by 194%. This includes, primarily, income from investments and other treasury income.

    Cost break-up
    (% of net sales) 2QFY03 2QFY04
    Raw materials 15% 12%
    Staff costs 15% 16%
    Power 9% 7%
    Freight 8% 8%
    Other expenditure 22% 22%
    Total 71% 63%

    Operating margins of the company have improved substantially during 2QFY04 and also for 1HFY04. The two components, which contributed to this, were an improvement in realisations and also a control on expenditure. The segmental break-up provided by the company indicates almost a 13% improvement in realisations during the first half of the current fiscal. As far as the operating expenditure is concerned, better asset sweating and resource utilisation has led to lower operational costs on incremental steel production, consequently leading to better operational efficiency (see the table above). The total operating expenditure (excluding purchase of steel and change in stock-in-trade) has improved from 71% of net sales in 2QFY03 to 63% of net sales for 2QFY04.

    Tisco has managed to reduce its interest expenses by 30% in the September quarter taking advantage of the low interest rate scenario and debt restructuring. Further, in the corresponding quarter last year, the company had incurred extraordinary expenses (Rs 857 m) on account of employee separation costs. In the current quarter, the company has incurred much lower expenses (Rs 16 m) under this head on account of some changes pertaining to the method of charging Employee Separation Compensation costs. All of the above ultimately led to the bottomline growth of over 100%!

    Better steel realisations have kept the Tisco counter buoyant over the last 6-7 months with the stock appreciating by 161% since the beginning of the current fiscal. Going forward, while the domestic demand will continue to remain strong, there could be some setback for the Indian steel sector as a whole on the exports front. With the danger of punitive restrictions being imposed by the US and China on steel imports, Indian exports could see some weakness. Performance of the company will also be dependent on the fortunes of global steel prices, which we feel should start displaying signs of weakness by the end of the current fiscal.

    At Rs 350, the stock is trading at a P/E multiple of 9.6x its annualised 1HFY04 earnings. Considering that valuations of steel stocks are linked to economic growth and despite the fact that few of them command some premium owing to their product mix and presence in the exports markets, we feel that the Tisco stock is fully valued at current prices.



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