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Near-term margin concerns

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Jitendra Kumar Gupta Mumbai

Although Tata Steel reported a good set of numbers for the June quarter, performance of its international operations still remain a cause of worry for most analysts. The company did report a consolidated net profit of Rs 1,825 crore for the June quarter, compared to a net loss of Rs 2,008 crore in the year-ago period, even as revenues jumped 16 per cent year-on-year. But total volumes were up a mere 0.5 million tonnes (mt) to six mt.

The improvement was largely driven by a sharp rise in margins as a result of better steel prices and turnaround of its Corus operations. The worry in the near-term, however, stems from the likely pressure on margins on the back of a decline in steel prices.

 

European operations, one-off impact
Tata Steel’s performance does looks good compared to last year’s quarter, but its European operation reported a decline in delivery volumes from 3.9 mt in the March quarter to 3.7 mt in the June quarter, which was partly on account of the fire in the Muiden plant. Also, over the same period, Corus’ earnings before interest, taxes, depreciation and amortisation (Ebitda) dropped from $94 a tonne to $79 a tonne.
 

CORUS BOOSTER
 Q1FY10Q4FY10Q1FY11
CONSOLIDATED
Sales (mln tonne)5.56.56.0
Ebitda/tonne ($)-1.0183.0162.0
Sales (Rs crore)23,29227,50427,010
PAT (Rs crore)-220824051825
EPS (Rs)-25.127.420.6

However, analysts believe core Ebitda per tonne would have been higher at $105 a tonne, if adjusted for such one-off items as impact of foreign exchange and increased maintenance costs during the fire at the plant.

Margin pressure
While its domestic business is on a strong footing (expected to grow 10-12 per cent), the international business – which accounts for over 70 per cent of the company’s revenue – could feel some pressure.

“We believe margins for steel players would come under pressure as a result of sluggish realisations and rising raw material costs. Although capacity utilisation levels across the globe have been reviving, rising exports from China remain a worry, “ says Ravindra Deshpande, who tracks steel sector at Elara Capital.

The price of long and flat steel products have come down in the recent past by about 10 per cent, compared to the June quarter levels. Additionally, pressure is emanating as contract prices of such raw materials as iron ore and coal are currently quoting 10-15 per cent above average June quarter prices . The combined impact of lower steel prices and higher raw material prices could put pressure on margins, which is likely to be seen over the next two quarters.

Outlook
While the near-term consolidated performance of Tata Steel could be subdued, expect the second half of 2010-11 to be better and a good recovery in 2011-12. The stock is currently trading at reasonable valuations of nine times its 2010-11 earnings per share (EPS) of Rs 58 and seven times 2011-12 estimated earnings (Rs 74).

From Rs 517.70 levels, analysts see a small upside of 10-15 per cent over the next one year.

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First Published: Aug 17 2010 | 12:55 AM IST

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