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Tata Steel: The operating margin kicker - Views on News from Equitymaster
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Tata Steel: The operating margin kicker
Dec 3, 2008

Performance summary
  • Consolidated topline grows by 36% YoY during 2QFY09, helped mainly by higher realisations and volumes.
  • Expenses grow at a lower rate than topline, resulting into a strong EBITDA margin expansion of 4.5%.
  • Bottomline growth (excl. minority interest) comes in at 216% YoY during the quarter, led by higher margins, lower interest expenses and lower tax outgo.
  • Half yearly bottomline (excl. minority interest) grows by 121% YoY on the back of a 38% YoY growth in topline.
  • Profit after minority interest and share of profit of associates grew by 213% YoY during the quarter and 119% during the half year ended September 2008.


(Rs m) 2QFY08 2QFY09 Change 1HFY08 1HFY09 Change
Net sales 324,416 441,990 36.2% 636,586 877,557 37.9%
Expenditure 278,386 359,493 29.1% 541,891 724,700 33.7%
Operating profit (EBDITA) 46,030 82,497 79.2% 94,695 152,857 61.4%
EBDITA margin (%) 14.2% 18.7%   14.9% 17.4%  
Other income 790 844 6.8% 1,583 887 -44.0%
Interest (net) 13,702 8,208 -40.1% 22,221 16,451 -26.0%
Depreciation 10,215 11,470 12.3% 20,339 22,520 10.7%
Profit before tax 22,903 63,662 178.0% 53,718 114,773 113.7%
Extraordinary income/(expense) 1,059 (3,962)   4,938 (6,997)  
Tax 9,067 12,664 39.7% 19,670 21,594 9.8%
Profit after tax/(loss) 14,896 47,036 215.8% 38,987 86,183 121.1%
Net profit margin (%) 4.6% 10.6%   6.1% 9.8%  
Profit after Minority interest and share of profit of associates 15,244 47,717 213.0% 39,559 86,726 119.2%
No. of shares (m) 609.2 730.8   609.2 730.8  
Diluted earnings per share (Rs)*         159.5  
Price to earnings ratio (x)*         1.0  
( * on trailing twelve months earnings)

What has driven performance in 2QFY09?
  • Allaying slowdown fears in India and recession in Europe, Tata Steel has reported a strong 36% YoY growth in topline during the quarter. The growth has been a combination of all three viz. improved product mix, higher realisations and volumes.

  • A ruthless focus on cost cutting has seen Tata Steel improve its margins by a strong 4.5% over 2QFY08. Expenses grew at a lower rate than the topline. Almost all the cost head were lower (as % of sales) in 2QFY09 as compared to same period last year. With prices of key raw materials on the wane, margins are likely to receive further boost over the next couple of quarters. However, production cut at Corus may offset the same to a great extent.

    cost break up
    (Rs m) 2QFY08 2QFY09 Change 1HFY08 1HFY09 Change
    Raw materials 146,153 212,056 45.1% 283,167 413,705 46.1%
    % sales 45.1% 48.0%   44.5% 47.1%  
    Staff cost 40,061 47,545 18.7% 80,613 96,557 19.8%
    % sales 12.3% 10.8%   12.7% 11.0%  
    Freight and handling 14,700 16,067 9.3% 28,848 33,383 15.7%
    % sales 4.5% 3.6%   4.5% 3.8%  
    Purchase of power 11,552 17,698 53.2% 22,811 33,848 48.4%
    % sales 3.6% 4.0%   3.6% 3.9%  
    Other expenses 65,922 66,127 0.3% 126,452 147,206 16.4%
    % sales 20.3% 15.0%   19.9% 16.8%  

  • The bottomline (excl. minority interest) growth came in at 216% YoY mainly on account of decrease in interest outgo and lower tax charges. It may be noted that the accounting policy had been changed in the quarter with the actuarial gains and losses on funds of employee benefits of Tata Steel UK now being accounted in reserve and surplus in the consolidated balance sheet. Had it been routed through the P&L account, profit for the current quarter would have been higher by Rs 9.6 bn and for the half year would have been lower by Rs 43.9 bn.

What to expect?
At the current price of Rs 158, the stock is trading at a multiple of 0.3 times our estimated FY11 book value per share. Although there has been a lot of concern in the market with respect to Corus operations, we have already been conservative in our valuation of the company and hence, do not feel the need to revisit our numbers on that front. Projections on the domestic side though need to be revised downwards a bit. Having said that, we remain positive on the stock from a medium term perspective. We will come out with an updated research report shortly.

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