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Tata Steel: Volume growth boost's bottomline - Views on News from Equitymaster

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Tata Steel: Volume growth boost's bottomline

Nov 14, 2013

Tata Steel has announced its September quarter (2QFY14) results. On a consolidated basis the company has reported a 7.4% YoY growth in topline. At the bottomline level the company reported a net profit as against a net loss when compared to the same period last year. Here is our analysis of the results.

Performance summary
  • Consolidated topline grew by 7.4% YoY on back of higher sales volume.
  • Consolidated operating profit was up by 60.4% YoY while the operating margins increased by nearly 3.3%.
  • On a consolidated basis, the company reported a net profit as against a net loss when compared to the same period last year.
  • On a standalone basis, the company reported an increase of 8.4% YoY in net sales and 15.4% YoY in net profits.
  • For the half year ended September 2013, on a consolidated basis the company reported a 2.2% YoY increase in net sales and 778.7% YoY increase in net profits.

Financial Performance
  Standalone results Consolidated results
(Rsm) 2QFY13 2QFY14 Change 2QFY13 2QFY14 Change
Netsales 91,506 99,210 8.4% 341327 366449 7.4%
Expenditure 66,343 69,831 5.3% 318227 329395 3.5%
Operating profit (EBITDA) 25,162 29,379 16.8% 23,101 37,054 60.4%
EBDITA margin (%) 27.5% 29.6%   6.8% 10.1%  
Other income 2,397 3,257 35.9% 2018 2034 0.8%
Interest (net) 4,539 4,366 -3.8% 9721 10666 9.7%
Depreciation 3,913 5,510 40.8% 13349 14440 8.2%
Profit before tax 19,107 22,760 19.1% 2,048 13,981 582.7%
Extraordinaryincome/(expense) 96     427    
Tax 5,695 7,173.00 26.0% 6608 4472 -32.3%
Profit after tax/(loss) 13,508 15,587 15.4% (4,133) 9,510 -330.1%
Minorityinterest 0 0   275 -375 -236.2%
Share ofprofit of associates 0 0   218 33 -84.9%
PATafter minority and sh. of assoc. profit 13,508 15,587 15.4% (3,639) 9,168 NA
Netprofit margin (%) 14.8% 15.7%   -1.1% 2.5%  
No. of shares (m) 971 971   971 971  
Dilutedearnings per share (Rs)*   52.1        
Price to earnings ratio (x)*   7.2        
(* trailing 12 months earnings)

What has driven performance in 2QFY14?
  • Tata Steel reported a 7.4% YoY growth in topline on a consolidated basis and 8.4% YoY growth in topline on a standalone basis during 2QFY14. This was on back of higher volumes across regions and cost saving measures in Europe. The groupís steel deliveries in 1HFY14 increased by 7.7% to 12.6 mt (million tonnes) compared to 11.7 mt in 1HFY13. Deliveries in 2QFY14 increased by 6.7% to 6.48 mt versus 6.07 mt in 2QFY13.

    Cost break-up
      Standalone results Consolidated results
    (Rs m) 2QFY13 2QFY14 Change 2QFY13 2QFY14 Change
    Raw materials consumed 23794 23460 -1.4% 164972 155270 -5.9%
    % sales 26.0% 23.6%   48.3% 42.4%  
    Staff cost 8300 9773 17.8% 45393 51709 13.9%
    % sales 9.1% 9.9%   13.3% 14.1%  
    Purchase of power 5876 6569 11.8% 13735 15719 14.4%
    % sales 6.4% 6.6%   4.0% 4.3%  
    Freight and handling 5163 6340 22.8% 17952 21460 19.5%
    % sales 5.6% 6.4%   5.3% 5.9%  
    Other expenditure 23210 23689 2.1% 76175 85237 11.9%
    % sales 25.4% 23.9%   22.3% 23.3%  

  • On the domestic front, Tata Steel India registered a 16.8% YoY growth in operating profit. The outperformance in operating profit was largely due to higher sales volume and lower employee costs. Employee costs declined 2.5% QoQ. Raw material costs per ton increased from Rs 10,596/ton in 1QFY14 to Rs 11,500/ton due to an increase in landed coking coal costs. Power costs per ton of steel decreased on a QoQ basis due to lower thermal coal prices. Other expenditure per ton of steel jumped 5.5% QoQ due to the forex loss included in the quarter. Operating profit per ton for the domestic operations increased marginally by 1.6% QoQ to Rs 14,402/ton. Average blended realizations in India were higher by 2.9% on a QoQ in rupee terms as the impact of lower steel prices was offset by an increase in revenue from the FAMD division. During the quarter flat product prices remained flat, whereas that of long product prices declined by 23% QoQ. The company has taken price hikes worth Rs 2,0004,000/ton across flat product segments over the last two months.

  • Tata Steel on a consolidated level registered an operating profit growth of 60.4% YoY. This was due to outperformance in its European operations. During the quarter, European operations registered an adjusted operating profit of US $89 m. EBIDTA/ton for European operations stood at US $26/ton. This was due to a decline in raw material costs and the various cost saving initiatives taken by the company. The pressure on margins during the quarter due to softer realizations was somewhat offset by higher volumes, lower raw material costs and operational efficiencies. The management expects second half to be similar to 1HFY14 as prices have recovered along with a marginal revival in demand.

  • The South East Asian operations were partly affected by a furnace shutdown in Singapore, which came back into operation from August. Volumes improved significantly at both NatSteel and the Thai operations. South East operations registered a 38.7% QoQ increase in operating profit on the back of higher volumes and lower scrap prices.
What to expect?
We believe domestic operations would continue to be the earnings driver for Tata Steel over the next two years. Even though near term earnings in Corus would remain under pressure due to oneoff items, we expect Corus to deliver steady EBIDTA/ton in FY15. We expect Tata Steel to report strong earnings over the next two years due to 1) impact of new 2.9mtpa capacity 2) impact of restructuring exercise in Europe 3) marginal revival in demand in the European region 4) benefits from overseas raw material projects. At the current price of Rs 370, the stock trades at a multiple of 7.2 times its TTM P/E on a standalone basis. We maintain our Hold view on the stock from a long term perspective.

We would like to gently remind you that your allocation to equities should be decided upon after keeping aside some safe cash. Also within your overall exposure to equities please ensure that you broadly follow our suggested asset allocation and that no single stock comprises more than 5% of your portfolio.

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