Even as things are looking up for Tata Steel, concerns relating to its European unit are proving to be a dampener
Tata Steel reported a consolidated loss of Rs 2,707 crore for the September 2009 quarter, its third consecutive quarterly loss. The losses are largely on account of the continuous pressure at its European operation (Tata Steel Europe; earlier Corus) due to lower utilisation, subdued steel prices and high input cost. Tata Steel Europe’s (TSE) restructuring cost of Rs 910 crore and an Rs 800 crore loss at its Teeside Cast Products (TCP) operations have added to its woes.
EUROPE: Still some concerns
Although things were looking up for Tata Steel, last week’s news about closure of TSE’s TCP operations from January 2010 has dampened sentiments. Although TCP was operating at very low capacity and hence, reporting losses, the closure is estimated to cost the company about 80 million pounds. The good part is that for the remaining 85 per cent capacity of TSE, the company expects the second half of the fiscal to be better with utilisation levels likely to improve to 80 per cent as compared to 67 per cent in the first half leading to economies of scale and better margins. Thereafter, it expects a recovery in the next year.
Additionally, the depleting high-cost raw material inventory will add to TSE’s margins. For September quarter, Corus reported an operating loss of $53 per tonne, which was lower than $117 in the June quarter. Led by these improvements, Tata Steel is expecting to turn profitable at the operating level in the second half.
| NOTHING IMPRESSIVE | ||||
| in Rs crore | FY09 | % chg | H1FY10 | % chg |
| Net sales | 147,365 | 12.1 | 48,450 | -44.6 |
| Operating profit | 14,799 | -40.9 | -528 | NA |
| Net profit | 4,951 | -59.9 | -4,916 | NA |
| EPS (Rs) | 62 | -62.7 | – | – |
| PE (x) | 9 | - | – | – |
| Source: Capitaline, % change is year-on-year | ||||
Improving outlook
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Meanwhile, analysts also expect an improvement in profits for the rest of the year. However, on an overall basis, Tata Steel could still end up with a consolidated loss of about Rs 2,000 crore for the current year. Most analysts expect larger gains only in 2010-11, when volumes and realisations are expected to rise leading to a 5-10 per cent improvement in sales and a consolidated net profit of Rs 5,500 crore. Tata Steel has already undertaken several cost cutting initiatives which should yield about $144 million in savings during the second half besides securing cheaper sources of raw material. Tata Steel has recently formed an 80-20 JV with DSO Projects of Canada, which will start supplying iron ore reserve from May 2011. On the back of these developments, analysts expect TSE’s operating profit margins to improve from just one per cent in 2009-10 to 6-7 per cent in 2010-11.
Conclusion
The stock, meanwhile, has run up to levels where analysts feel there is limited room for further appreciation in the near-term. In 2009-10, they expect Tata Steel to report a consolidated loss per share of Rs 20-25, while an EPS of Rs 55 in 2010-11. At Rs 576, the stock trades at a PE of 11 times its estimated 2010-11 earnings, and looks expensive.