Tata Steel: Performance improves in Dec quarter

Higher realisations help the steel major tide over demand slowdown.

Thanks to its focus on the value-added steel market, Tata Steel reported an improved performance in the December 2007 quarter with its standalone operating profit up 17.6 per cent y-o-y to Rs 2096.6 crore, while net sales improved 11.3 per cent to Rs 4973.9 crore.

Operating profit margin also improved 230 basis points y-o-y to 42.2 per cent in the third quarter. Rival SAIL's operating profit margin also improved 280 basis points y-o-y to 31.3 per cent.

Meanwhile, Tata Steel's sales were 1.24 million tonne in the December 2007 quarter, a 0.7 per cent rise y-o-y. But its realisations were estimated at nearly Rs 40,000 per tonne during the period, an increase of 10.5 per cent y-o-y.

Besides higher realisations, Tata Steel also benefited from keeping a tight check on its operating costs - its adjusted raw material costs as a percentage of net sales declined 70 basis points y-o-y to 17.5 per cent.

SAIL's realisations were estimated at Rs 31,777 per tonne in the December 2007 quarter.

Tata Steel was able to get better realisations better than Sail in the last quarter, given its focus on the higher margin auto-grade steel products, point out analysts.

In the European markets, however, where Tata Steel's recently acquired UK-based Corus derives a significant portion of its revenues, there have been signs of a demand slowdown in the December quarter, analysts said.

This was attributed to excess stock levels at service centres, at a time when demand from the user industry is sluggish. It is understood that Corus sells nearly 70 per cent of its output on the spot market.

Also, Corus is likely to grapple with significant cost pressures in CY08, given the impending global rise in contract iron ore and other key raw material prices.

The Tata Steel stock has declined 11 per cent over the past three months compared to 8.4 per cent fall in the Sensex.

Meanwhile, steel companies have hiked domestic prices by Rs 1,000-2,500 per tonne, due to the price hike in raw materials and other operational costs faced by the company. At Rs 750, the stock trades at 10.3 times estimated FY08 and 9 times FY09 earnings.