-
Will earnings growth slow down?
Worries on lower prices have also led to many analysts downgrading the Tata Steel's EPS estimates. Tata Steel posted a 12.46 per cent growth in net profit to Rs 1045.42 crore in the quarter ended September 2005 as compared to the corresponding quarter in 2004.
Net sales grew by only 3.39 per cent during the quarter to Rs 3865.10 crore. The earnings growth was well below analyst expectations. Operating profit growth was limited to a mere 1.4 per cent at Rs 1651.6 crore in the September quarter.
Though the quarterly results are not strictly comparable with September quarter of FY04, considering the merger of NatSteel Asia with effect from February 2005, there was a decline of 84 basis points in the operating profit margin of the merged entity. Sequentially too, operating margins fell 311 basis points in the September quarter.
According to analysts, a key factor that contributed to the squeeze on margins was a 19.53 per cent y-o-y growth in raw materials costs consumed in the last quarter. The increase was largely on account of higher coke cost. Also, other expenditure grew about 6.9 per cent y-o-y.
The company also suffered on account of lower prices. Spot HRC prices were down about 12-15 per cent on a y-o-y basis in the second quarter of 2005-06 and that was largely due to surging steel output in China. For the first half of 2005-06, net profit stood at Rs 1969.53 crore, an 18 per cent increase from September 2004.
Given the huge capex plans that Tata Steel has lined up, the worry is that cash flows, among the company's strong points may take a hit going forward.
According to an estimate Tata Steel is likely to implement a capex of Rs 18,500 crore over 2006-07 and 2007-08. One foreign brokerage firm recently estimated that free cash flows at Rs 1046.80 crore in 2004-2005 will turn negative from 2006-07 onwards.
The brokerage goes on to add that there is a risk of the balance sheet getting stretched as the capex plans roll out. This combined with a falling steel prices are what makes analyst fret.
However, there is another school of thought. Tata Steel management itself has stated that steel prices are likely to be stable going forward. With the company's inherent strengths of a contained cost structure, better product mix and higher sales of branded products, Tata Steel is expected to achieve much better operating margins than its peers.
The company plans to improve its product mix further, while reducing costs by higher usage of domestic coal, higher coal injection and a lower coke rate. The company also intends to increase usage of sinter, while reducing usage of sponge iron and purchased metallic. An improvement in margins of NatSteel should also augur well for the future. These steps should enhance the company's status as one of the lowest cost producers of steel in the world.
Tata Steel's stated plans for the future include de-integrated dispersal of facilities in select geographies, ownership and development of raw material sources, access to captive ports and other dedicated logistics facilities, branding and value added products while pursuing strategic acquisitions.
Best of the lot
According to a leading domestic brokerage, the company's revenues are likely to grow by above 8 per cent to Rs 15,800 crore in FY06, while bottomline growth is slated to be around 23 per cent at Rs 4340 crore. The stock is currently valued at a P/E of 5.3 on a trailing 12-month basis at Rs 342.
Global peer group valuations, which include companies like Arcelor (3.7x), Baoshan Iron & Steel (5.3x), Blue Scope (5.4x), Posco (4.6x) and Thsyssenkrupp (7.2x) are comparable. Closer home, analysts pick Tata Steel as the best bet in the steel sector.
According to Vijay Bhambwani, CEO of Mumbai-based BSPLindia.com the uptrend seems to have fractured in Tata Steel.
