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Tata Steel: High cost hit profits
Nov 19, 2012

Tata Steel has announced its September quarter (2QFY13) results. On a consolidated basis the company has reported a 4.1% YoY growth in topline. At the bottomline level the company reported a net loss as against a net profit when compared to the same period last year. Here is our analysis of the results.

Performance summary
  • Consolidated topline grew by just 4.1% YoY on back of lower sales volume.
  • Consolidated operating profit was down by 19.4% YoY while the operating margins reduced by nearly 1.9%.
  • On a consolidated basis, the company reported a net loss as against a net profit when compared to the same period last year.
  • On a standalone basis, the company reported an increase of 11.4% YoY in net sales and a decline of 9.7% YoY in net profits.
  • For the half year ended September 2012, on a consolidated basis the company reported a 3% YoY increase in net sales and 98.1% YoY decline in net profits.

Financial Performance
  Standalone results Consolidated results
(Rs m) 2QFY12 2QFY13 Change 2QFY12 2QFY13 Change
Net sales 82,119 91,506 11.4% 327979 341327 4.1%
Expenditure 54,257 66,343 22.3% 299305 318227 6.3%
Operating profit (EBITDA) 27,862 25,163 -9.7% 28,674 23,100 -19.4%
EBDITA margin (%) 33.9% 27.5%   8.7% 6.8%  
Other income 2,495 2,397 -3.9% 3361 2018 -40.0%
Interest (net) 4,767 4,539 -4.8% 10492 9721 -7.3%
Depreciation 2,871 3,913 36.3% 11088 13349 20.4%
Profit before tax 22,720 19,107 -15.9% 10,455 2,047 -80.4%
Extraordinary income/(expense) 0 96     427  
Tax 7,767 5,694.90 -26.7% 9065 6608 -27.1%
Profit after tax/(loss) 14,952 13,509 -9.7% 1,390 (4,133) -397.4%
Minority interest 0 0   542 275 -49.2%
Share of profit of associates 0 0   192 218 13.6%
PAT after minority and sh. of assoc. profit 14,952 13,509 -9.7% 2,124 (3,640) NA
Net profit margin (%) 18.2% 14.8%   0.6% -1.1%  
No. of shares (m) 959 971   959 971  
Diluted earnings per share (Rs)*   58.6     48.3  
Price to earnings ratio (x)*   6.4     7.8  
* On a 12-month trailing basis

What has driven performance in 2QFY13?
  • Tata Steel reported a 4.1% YoY growth in topline on a consolidated basis and 11.4% YoY growth in topline on a standalone basis during 2QFY13. This was due to lower demand in European and Indian operations. The group's steel deliveries in 1HFY13 declined by 3.5% to 11.7 mt (million tonnes) compared to 12.1 mt in 1HFY12. Deliveries in 2QFY13 increased by 6.9% to 6 mt versus 5.6 mt in 1QFY13 but were down by 0.8% from 6.1 mt in 2QFY12.

    Cost break-up
      Standalone results Consolidated results
    (Rs m) 2QFY12 2QFY13 Change 2QFY12 2QFY13 Change
    Raw materials consumed 18938 23794 25.6% 164821 164972 0.1%
    % sales 23.1% 26.0%   50.3% 48.3%  
    Staff cost 6908 8300 20.2% 39811 45393 14.0%
    % sales 8.4% 9.1%   12.1% 13.3%  
    Purchase of power 4320 5876 36.0% 11807 14047 19.0%
    % sales 5.3% 6.4%   3.6% 4.1%  
    Freight and handling 3900 5163 32.4% 15608 17952 15.0%
    % sales 4.7% 5.6%   4.8% 5.3%  
    Other expenditure 20191 23210 14.9% 67258 75863 12.8%
    % sales 24.6% 25.4%   20.5% 22.2%  

  • On the domestic front, Tata Steel's operating profit declined by 9.7% YoY. The EBITDA/ tonne in the Indian business fell to USD $263, lowest since 3QFY10. The main reason behind this is 6% fall in realizations on a sequential basis. The quantum of drop in realizations remained higher than the peers as far as 2QFY13 is concerned. The company also purchased coke during the quarter, which also added to the cost pressure, as the raw material costs as a percentage to sales rose by 3.5% on QoQ to 25%. Power costs as percentage to sales also has gone up by 1% on QoQ to 7% due to higher power tariffs. EBITDA margin for the standalone business stood at 27.5% for the quarter, down 6.2% YoY and 3.7% QoQ. The company has indicated that purchase of coke would continue till at least January 2013. Looking at the spread between coking coal and coke and along with subdued steel prices we believe, this would continue to put pressure on the margins.

  • Tata Steel Europe's sales volumes declined 2% YoY (up 6.5% QoQ) to 3.42 m tonnes. Realisations declined USD $80/tonne QoQ to USD $1124. This we believe has not yet reflected the drop in steel prices during this period. Also, steel prices continue to correct further (6% in October over average prices in July- September period). Higher than expected fall in realisations led Tata Steel Europe to post loss of USD $7.6 m. Seasonal weakness is also expected in 3QFY13. Thus, we believe European operations to remain under pressure in near future.

  • Tata Steel's South-East Asian operations posted 10% YoY and 3% QoQ drop in volume. Surprisingly, realisation jumped 25% YoY and 7% QoQ in 2QFY13, but this didn't help in EBITDA performance, which was down 14% YoY and 78% QoQ, implying severe cost pressure.

  • Net debt at the end of 2QFY13 stood at Rs 551.7 bn versus Rs 540.2 bn at the end of 1QFY13. Net surplus in British Steel Pension (BSP) and Stichting Pensioenfonds Hoogovens (SPH) schemes were down from 38 m at the end of 1QFY13 to 34 m at the end of 2QFY13. The company has completed triennial valuation of the above schemes and there is a deficit of 500 m, which needs to be bridged over a 15-year period. The company has indicated minimal cash flow in the initial years.

What to expect?
Tata Steel has been purchasing coke from the market, which is likely to be over post commissioning of coke over battery- 10 during January 2013. Company is going ahead with Orissa phase- I greenfield project and don't see any substantial problem with regards to ongoing penalty issue on iron ore mining in Orissa. The company maintained its guidance of a 1m tonne increase in volumes in FY13.

The Indian operations continued their steady performance against a backdrop of lacklustre demand in the market place and increasing imports. Ramp-up of the newly expanded capacity at Jamshedpur resulted in increased deliveries in a soft market, primarily because of their focus on the distribution business and customer orientation. The slew of policy announcements by the Government to promote growth augur well for the Indian economy.

We believe that current valuations are already factoring in most of the concerns over Europe and the ramp up of domestic volumes from the 3 mtpa expansion would drive the profit growth going ahead. At the current price of Rs 370, the stock trades at a multiple of 7.8 times its TTM P/E on a consolidated basis. We maintain our Buy view on the stock from a long term perspective.

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