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Markets reacted modestly to Tata Steel despite a massive 70.4% decline in consolidated net profit at Rs 337.3 crore for June 2014 as compared to Rs 1,139 crore in the corresponding period last fiscal.
The sharp fall in profit is attributed to provision for impairment of non-current assets, higher taxes and interest cost. Analysts had expected net profit of Rs 906 crore on revenues of Rs 35,300 crore.
Interestingly, Tata Steel managed to beat analyst expectations on the revenue front with Rs 36,427 crore in sales but fell marginally short on the operating profit front which rose 15.9% to Rs 4,272 crore against projections of Rs 4,300 crore.
Deviation in the operating margin, however, was much higher with analysts expecting the company to record 12.2% margins while the company could only manage 11.73%.
According to analysts Kawaljeet Saluja and Abhishek Poddar of Kotak Securities, Tata Steel missed market expectations on operating profit on account of higher-than-expected employee cost and weak ferro alloy business in India. Also, the company had to face pricing pressure from China imports for it s South East Asia business.
Though the European business continued to be disappointing, there was positive surprise on the operating profit front. Tata Steel Europe recorded earnings before interest, tax, depreciation and amortisation, or EBITDA, of US$166 million and its EBIDTA/tonne stood at $49 as compared to market expectation of $40. EBITDA is a key indicator of operating efficiencies.
According to Ashish Kejriwal of Elara Capital, Tata Steel’s Europe units sold higher proportion of semis to liquidate inventory, which had an adverse impact on product mix. Thus, despite lower HRC prices in Europe, its blended steel realization improved from $32 per tonne in the previous quarter to a record high of $49 per tonne in June quarter.
A key feature of June 2014 quarter numbers was the Rs 1,580 crore write-down of investment in its Benga coking coal project in Mozambique, which offset the profit the company managed from sale of Dharma port.
In a post-results conference call, Tata Steel management said that it has put on hold the expansion projects at Khonbond Iron ore mine (captive mine for upcoming 3 mtpa Kalinganagar steel plant) and Sukhinda chrome ore mine as clearances from the Odisha state government are awaited.
As for its European operations the company warned that volumes could decrease in the second half. But what has come as a positive surprise for analysts the company’s forward guidance of lower capital expenditure from Rs 16,500 crore to Rs 14,000 crore.
Another mild positive in Tata Steel’s June numbers is that net debt has come down by nearly 2% to Rs 70,800 crore from Rs 72,600 crore in the previous quarter. Interest payouts, though, drained nearly 30% of operating profit. Debt is expected to reduce further as sale of the company’s land parcel in Borivali (Mumbai) at Rs 1,150 crore is yet to be reflected.
Kotak Securities however, expects net debt to increase in subsequent quarters as the company steps up capex to complete the Kalinganagar project and iron ore project in Canada. Net debt is expected to peak at Rs 73,000 crore, the firm said.
While analysts are not too dejected by Tata Steel’s numbers, it is the high valuations which have forced them to maintain a cautious rating. Kotak Securities maintains its ‘Reduce’ rating on the back of the fact that the stock Is trading at 11 times FY-14 earnings and 6.7 times EBITDA, even as concerns remain over potential increases in regulatory levies and tax on mineral ores.
