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Tisco: Burgeoning cost - Views on News from Equitymaster
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  • Oct 31, 2001

    Tisco: Burgeoning cost

    A steep decline in steel prices, excess capacity in the world markets and mounting inventory levels are some of the factors, which are depressing the Indian steel industry. Hot roll (HR) steel prices have come down to US$ 250 per tonne from an all time high of US$ 460 per tonne in May 1995.

    (Rs m) 2QFY01 2QFY02 Change 1HFY01 1HFY02 Change
    Gross Sales 18,095 19,320 6.8% 35,378 35,434 0.2%
    Other Income 207 257 24.4% 362 316 -12.7%
    Expenditure 13,907 16,445 18.3% 27,612 29,460 6.7%
    Operating Profit (EBDIT) 4,188 2,875 -31.4% 7,766 5,974 -23.1%
    Operating Profit Margin (%) 23.1% 14.9%   22.0% 16.9%  
    Interest 668 952 42.6% 1,699 2,098 23.5%
    Depreciation 1,139 1,313 15.3% 2,261 2,670 18.1%
    Profit before Tax 2,588 866 -66.5% 4,168 1,522 -63.5%
    Other Adjustments -1,346 -535 -60.3% -1,821 -982 -46.0%
    Tax 89 56 -36.6% 180 54 -70.2%
    Profit after Tax/(Loss) 1,153 275 -76.1% 2,167 486 -77.6%
    Net profit margin (%) 6.4% 1.4%   6.1% 1.4%  
    No. of Shares (eoy) (m) 368.0 368.0   368.0 368.0  
    Diluted Earnings per share* 27.2 8.8   21.7 8.0  
    P/E (at current price)   9     10  
    *(annualised and before other adjsts.)            

    Tisco, the No. 1 steel company in the world in terms of the lowest cost of production has beaten the industry trend by reporting a 7% rise in turnover in the second quarter and a marginal growth of 0.2% in the first half of the current year. Although, the company maintained its per tonne realisation, a significant rise in raw material cost and interest capitalization led to a sharp decline in earnings. In the first half of the year, Tisco's profits dropped by 78%.

    The company's exports as a percentage of total sales too declined to 7% from 13% in the second quarter of the previous year. Exports in value terms fell by 39% on the back of antidumping duties and import restrictions imposed by the US on the Indian steel exports. This has resulted in excess availability of steel in the domestic market and a consequent pressure on steel prices.

    However, the company has overall outperformed the industry. While the industry consumption of flat products declined by 0.4% in 1HFY02, Tisco's flat product sales grew by 0.3%. Consumption of long products, which accounts for 22% of its total production also rose by 24% compared to just 5% growth in industry. Tisco has 9% market share in long products sales.

    Tisco's efforts in the past few years have resulted in significant cost savings (Rs 2 bn expected in FY02). However, the company could not control the rise in raw material and staff cost, which increased by 20% and 24% respectively in 2QFY02. As a result, its overall cost of production per tonne increased by 15% while sales realisations remained flat in the second quarter. This has resulted in a huge 830 basis points drop in operating margins. The fall was much higher than expected. Also, commencement of second galvanising line of cold rolling mill resulted in higher interest capitalisation offsetting the gains from restructuring high cost debt (14% debentures of Rs 500 m).

    Expenses as a % to sales
    (Rs m) 2QFY01 2QFY02
    Consumption of raw material 19.2% 21.5%
    Staff cost 15.0% 17.3%
    Excise duty 12.0% 11.9%
    Purchase of power 10.9% 10.2%
    Freight and handling 9.1% 8.5%
    Other expenses 22.6% 24.6%

    With weakening demand in the steel industry, Tisco has stated its vision to foray into titanium, which is considered to be a high margin business. In the next 10 years, the company aims to diversify its portfolio such that titanium would contribute higher proportion to total revenues. Apart from this, Tisco also aims to foray into ferrochrome project.

    At the current market price of Rs 78, Tisco is trading at a P/E multiple of 10x 1HFY02 annualised earnings. Steel demand globally is unlikely to improve in the next two quarters and prices are likely to remain at lower levels. This would further impact the company's business in the coming quarters. However, Tisco's initiatives to foray into other international markets for exports and its strong brand could trim the drop in earnings.



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