 "Tata Steel turns cautious despite rise in profit")
India's largest producer of steel alloy posted Rs 1,139 crore profit in the June quarter, the most in two years, beating analysts' estimates. While this included one time-deferred tax gain of Rs 415 crore at its European unit, operational improvements also contributed to the growth in earnings.
"I think the best way to think right now is to not think of Phase II," said Koushik Chatterjee, chief financial officer of Tata Steel, in the conference.
By putting investments in Phase II of the Odisha project on hold, the company has signalled that it hopes to continue on the same cost-cutting drive that it embarked on a few years ago to improve its operating profit that came under severe stress after its acquisition of Corus.
The new approach on the second phase of the Kalinganagar project is markedly different from the company's earlier stand. "Given the integrated nature of the development, even the returns on Phase I may be hurt if Phase II didn't come up," wrote Neelkanth Mishra, analyst, Credit Suisse, in an earlier note quoting the company.
However, Mishra welcomes the company's cost-cutting measures. "Caution on Phase II is welcome news even if it means Phase I will be sub-optimal," he adds.
Tata Steel's operational profitability, or earnings before interest, tax, depreciation and amortisation (Ebitda), rose 4.9 per cent to Rs 3,760 crore showing a higher margin of 11.4 per cent against the revenue, compared with 10.6 per cent a year ago.
The company saved Rs 380 crore in costs in the quarter with its continued efforts to improve operations. Besides, total expenses fell 3.8 per cent to Rs 30,520 crore as raw material expenses dropped 9.9 per cent to Rs 10,440 crore.
Higher production in Europe and India helped Tata Steel increase sales volumes, while cost-cutting measures boosted profitability. Tata Steel sold 3.14 million tonnes of steel in the last quarter in Europe, which accounts for two-thirds of its output, compared with 3.21 million tonnes a year earlier. Group shipments rose 7 per cent to 6.1 million tonnes.
"There have recently been encouraging signs of improving economic conditions in some European economies, the UK in particular," said Karl-Ulrich Koehler, chief executive officer of Tata Steel Europe in a company statement. "We are poised to capitalise on them if they translate more strongly into increased demand from steel-intensive sectors."
At the same time, the company's Indian operations have become more important as production at its European units has been falling over the years. It came down to to 13 million tonne in 2011-12 from 23 million tonne in 2007-08. To meet the demand for flat steel products mainly used by the automobile sector, Tata Steel has been building a six-million tonne unit at a cost of about $7 billion (then Rs 38,500 crore) in Kalinganagar. The plant is being built in two phases of 3 million tonne each. The first phase is expected to be operational by the end of 2014. The second unit was expected to become operational in 2016. But now the project has been put on the backburner.
The company's caution stems from its rising debt level amid slowing demand. Tata Steel's consolidated debt increased to Rs 66,074 crore at the end of 2012-13, up from Rs 59,897 crore in the previous year and Rs 3,377 crore prior to the acquisition of Corus. The debt is expected to increase to over $12 billion by the next financial year largely due to the investment on Phase I of Kalinganagar.
"The company is not looking to spend anything on Phase II of this project before completion of Phase I and before evaluating demand conditions and its own long-term strategy, which we believe is positive," says Prakash Joshi, analyst with domestic brokerage IDFC.
The demand outlook, according to the World Steel Association, is likely to rise 5.9 per cent in 2013 and 7.5 per cent in 2014 from a mere 2.5 per cent in 2012. Global demand for the same period is likely to rise 2.9 per cent in 2013 and 3.2 per cent in 2014, as against 1.2 per cent in 2012.
Tata Steel Europe, earlier called Corus, has largely been a drag on the company's profitability since its acquisition in 2007 for $12.1 billion (then Rs 53,460 crore). The deal made Tata Steel the world's fifth-largest steel producer with annual capacity of 25 million tonnes. It promised the company access to high-end European markets, supported with low-cost Indian manufacturing.
However, the 2008 sub-prime crisis poured cold water on those plans. Automobile and construction companies, the main sectors affected in the financial crisis, were key customers of Corus. The company recorded a decline in Ebitda for 2008-09, followed by a $303- million (Rs 1,361 crore) operating loss in 2009-10.
The losses were due to a significant decline in European demand and continuation of production at the loss-making Teesside Cast Products unit in the UK. A consortium of four customers pulled out of a 10-year purchase contract with Corus, leading to a loss of nearly 1,500 jobs. The contract had helped the company sell nearly 80 per cent of the plant's total output.
Corus undertook two major cost-saving initiatives in the second half of 2008-09. In 2009-10, the efforts led to savings of Rs 6,800 crore. The company came back into the black in the second quarter of 2010-11 on the back of improved economic sentiment and increased demand from governments in the US and Europe. The company reported operating profit of Rs 886 crore for the quarter, and renamed Corus as Tata Steel Europe. It also agreed to sell the beleaguered Teesside plant to Thailand's Sahaviriya Steel Industries for Rs 2,242 crore.
The operational improvements were supported by refinancing of about Rs 24,700 crore in term loans and revolving credit facilities. This pushed the repayment by three to four years, besides giving additional flexibility to borrow for working capital purposes and to incur capital expenditure. Following this, the company reported Rs 4,111 crore Ebitda for 2010-11 and Rs 1,775 crore for 2011-12. But in 2012-13, the Ebitda for Tata Steel Europe more than halved to Rs 764 crore as sovereign crisis in Europe curbed demand.
To counter this, the company ramped up production in India to take advantage of lower costs of production. Tata Steel India reported Ebitda of Rs 11,698 crore in 2012-13. Production at the over 100-year-old plant at Jamshedpur was raised from 4 million tonne in 2006 to 10 million tonne by 2012-13. Great hopes were also pinned on the two projects in Kalinganagar.
"That site will certainly have a Phase II, but the timing will depend on the optionality of the market and our comfort on the stabilisation of our operations and so on," said Chatterjee.