Tata Steel : Almost out of the woods

The current year will be a period of consolidation for the steel maker, but 2010-11 could see a recovery.

While Tata Steel’s sales volumes in the June 2009 quarter were up a fairly strong 22 per cent, drop in average realisations, higher raw material costs and a disappointing show from the ferro-alloys business impacted the profit after tax, which dropped 47 per cent to Rs 790 crore year-on-year. That was some way below the consensus estimate of Rs 950 crore.

Average blended realisations fell around 18 per cent year-on-year, better than expected but not good enough — revenues came off by about 9 per cent to Rs 5,616 crore. This, and the bigger raw material bill, pressured its operating profit margin (OPM). The cost of inputs remained high because of some of the older coking coal contracts negotiated by the company.

It led to a contraction in OPM for the steel business to 32 per cent from 48 per cent in the June 2008 quarter. Things are beginning to look up for the steel maker.

In the current year, the company is expected to sell around 23 million tonnes of steel, which should be possible given that the demand seems to be picking up — in the June 2009 quarter, it was up an estimated 5 per cent against a drop of around 1.5 per cent last year. Moreover, prices in India are also firming up, especially of flat products, and being a more efficient producer, Tata Steel has raised its share in the market.

Pricing environment in Asia is also improving, say industry watchers, adding that should the Chinese economy recover, the threat of cheaper exports from that country will diminish. Prices appear to be stabilising in Europe too, though that will not help Tata Steel’s European subsidiary Corus in the current year.

However, aggressive cost-cutting measures are being effected at Corus in the wake of the global downturn — a 20 per cent cut in workforce is being targeted, which should drive down fixed costs, and the manufacturing facilities are being restructured so that production is more efficient. That should help Corus post better profits in 2010-11 even if steel prices don’t rise too much. As for Tata Steel’s (standalone) net profits for 2009-10, analysts estimate a fall of about 60 per cent over Rs 11,600 crore reported last year.

The stock has risen 190 per cent since March this year and trades at Rs 462. Analysts feel it could do well because even if the steel maker’s numbers were muted this year, next year should see a turnaround.