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Tata Steel: Raw material costs weighs on profits
Nov 11, 2011

Tata Steel has announced its September quarter results. On a consolidated basis the company has reported a 14.5% YoY growth in topline and 89.3% YoY decline in net profits. Here is our analysis of the results.

Performance summary
  • Consolidated topline grows by 14.5% YoY during the quarter, led by strong volume growth.
  • Operating margins contract by 4.4% as higher raw material expenses and power costs take toll
  • Consolidated bottomline declines by 89.3% YoY. This was due to high raw material cost and lower average selling prices in Europe.
  • On a standalone basis, the company reported an increase of 15.6% YoY in sales and a decline of 27.6% YoY in net profits.

Financial Performance
  Standalone results Consolidated results
(Rs m) 2QFY11 2QFY12 Change 2QFY11 2QFY12 Change
Net sales 71068 82119 15.6% 286462 327979 14.5%
Expenditure 44777 54422 21.5% 249739 300479 20.3%
Operating profit (EBDITA) 26,290 27,698 5.4% 36,723 27,500 -25.1%
EBDITA margin (%) 37.0% 33.7%   12.8% 8.4%  
Other income 7327 236 -96.8% 8143 1204 -85.2%
Interest (net) 3425 2343 -31.6% 6637 7161 7.9%
Depreciation 2815 2871 2.0% 10781 11088 2.8%
Profit before tax 27,378 22,720 -17.0% 27,448 10,456 -61.9%
Extraordinary income/(expense) - -   (316) -  
Tax 6726 7767 15.5% 7450 9065 21.7%
Profit after tax/(loss) 20,651 14,952 -27.6% 19,682 1,390 -92.9%
Minority interest - -   103 542  
Share of profit of associates - -   3 192  
PAT after minority and sh. of assoc. profit 20,651 14,952 -27.6% 19,788 2,124 -89.3%
Net profit margin (%) 29.1% 18.2%   6.9% 0.6%  
No. of shares (m) 902 959   902 959  
Diluted earnings per share (Rs)*   72.3     111.9  
Price to earnings ratio (x)*   6.0     3.8  
(* annualised)

What has driven performance in 2QFY12?
  • Tata Steel reported a 14.5% YoY growth in topline on a consolidated basis and 15.6% YoY growth in topline on a standalone basis during 2QFY11. This was due to higher volumes, despite softening of steel prices. The growth in revenues was also because of increased focus on value added products.

  • Operating margins saw a decline of 4.4% YoY because of significant increase in raw material costs which saw a rise of 30.7% YoY and increase in power and fuel costs which rose by 18.5% YoY during the quarter ended September 2011. The European unit, which contributes about two-thirds of the group's output and buys all its raw materials from outside, faced a 40% increase in coking coal prices.

    Cost break-up
      Standalone results Consolidated results
    (Rs m) 2QFY11 2QFY12 Change 2QFY11 2QFY12 Change
    Raw materials consumed 15637 18938 21.1% 124064 162202 30.7%
    % sales 22.0% 23.1%   43.3% 49.5%  
    Staff cost 6837 6908 1.0% 38275 39811 4.0%
    % sales 9.6% 8.4%   13.4% 12.1%  
    Purchase of power 3615 4320 19.5% 9967 11807 18.5%
    % sales 5.1% 5.3%   3.5% 3.6%  
    Freight and handling 3603 3900 8.2% 14676 16850 14.8%
    % sales 5.1% 4.7%   5.1% 5.1%  
    Other expenditure 15086 20356 34.9% 62757 69809 11.2%
    % sales 21.2% 24.8%   21.9% 21.3%  

  • Net profits on a consolidated basis saw a decline of 89.3% YoY on account of high raw material cost and lower selling prices in Europe as well as adverse currency movements. The rupee depreciated 8.7% in the three months ended September 30, the biggest quarterly drop since 1992.

  • On a consolidated basis net profit margins declined from 6.9% YoY to 0.6% YoY during the quarter ended September 2011.

  • The Group's steel deliveries in H1 FY12 rose by 1.8% to 12.17 m tonnes compared to 11.96 m tonnes in H1 FY11. Steel deliveries increased by 0.8% to 6.11 m tonnes in Q2 FY12 from the 6.06 m tonnes recorded in Q2 FY11.

  • The company's expansion plans are progressing well. The forthcoming 2.9 million tonne per annum (mtpa) brownfield expansion at the Jamshedpur plant is expected to be commissioned in the last quarter of this fiscal year and will add to earnings in the next financial year. The Odisha project is on track as well with the first phase of 3 mtpa likely to be commissioned in 2014.

  • The company had a net debt of USD $9.2 bn at the end of September.

What to expect?
High inflation and resultant high interest rates are impacting steel demand in India in the near term. However, prices are stable and the long term growth fundamentals remain firmly in place. European steel demand remains under pressure due to contraction of manufacturing output. Capacity is now getting aligned with demand and import pressure is receding. South East Asian markets are expected to remain under pressure with apparent slowing in Chinese steel demand. Steel using sectors in China witnessing signs of slowing on the back of tight monetary policy, impacting raw material prices. Steel demand in Thailand would remain depressed due to severe floods in the country. Raw material prices are correcting with sharp fall in iron ore prices. However, they are expected to have a favourable effect only from the last quarter of this financial year.

At the current price of Rs 430, the stock trades at a multiple of 3.8 times its TTM P/E on a consolidated basis. We maintain our positive view on the stock from a medium term perspective.

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