Losing sheen

Tata Steel had to grapple with rising input costs

Tata Steel has reported a mere 1.4 per cent growth in operating profit to Rs 1,651.6 crore in the September quarter.

The company had merged the Singapore-based NatSteel Asia with effect from February, 2005, hence, the results are not strictly comparable with the corresponding period of the previous year.

The merged entity has seen its operating profit margin fall 82 basis points to 42.73 per cent in the previous quarter.

Sequentially, too, although not strictly objective given the differences in demand conditions, operating margins fell 311 basis points in the quarter.

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 has grown about 6.9 per cent y-o-y.

At the same time, even selling prices have been lower. Spot HRC prices, for instance, are down about 12-15 per cent on a y-o-y basis in Q2 FY 06 and that was largely on surging steel output in China.

To offset pricing pressures, the company has been focusing on supplying higher value steel to the automobile sector. As a result, the company's supplies of galvanised steel has jumped 221 per cent y-o-y to the sector last quarter.

Also, the management highlighted the emphasis on branded products to get better realisations. Nevertheless, realisations are estimated to have dropped about 10.5 per cent y-o-y per tonne.

The company's steel sales had grown 15.5 per cent to almost 1.79 million tonne in Q2 FY06, but pricing pressure saw net sales grow merely 3.4 per cent to Rs 3865.1 crore.

Investor fears of a further softening in steel prices led the stock to considerably underperform the Sensex over the last two months - the stock has dipped about 10.8 per cent compared with a 3.8 per cent gain in the broader market. After the correction, the stock trades at a mere 4.3 times estimated FY06 earnings.

M&M: Riding high

Mahindra & Mahindra's performance in the September quarter was much better than expectations.

Analysts were expecting an operating profit of about Rs 200 crore on an average this quarter, or a growth of about 7 per cent from last year's level of Rs 187 crore.

The company, however, reported an operating profit of Rs 218 crore, a growth of 16.6 per cent over last year's levels.

The company outperformed analyst estimates even on the revenue front by about 4 per cent, indicating that price realisations were higher than expected. The company has taken price increases in both the tractor and utility vehicles segments to offset increasing costs.

Prices of key inputs such as steel and rubber continue to be higher on a y-o-y basis, although the extent of increase has come down considerably this fiscal.

The company, however, has had to contend with an increase in costs owing to new emission norms. Overall margins were hit by 65 basis points, which means that the price increases weren't sufficient.

A look at the segment results shows that the automotive segment (which houses the utility vehicles, LCV, and three-wheeler business) has borne the brunt of the increase in costs. Its earnings before interest and tax margin fell 130 basis points last quarter to 10.2 per cent.

The farm equipment (tractor) segment, however, managed a 470 basis points improvement in margin, thanks mainly to a 47.8 per cent jump in volumes. Besides, the company has effected two price increases amounting to about 3 per cent since April.

The farm equipment segment accounted for about 53 per cent of incremental revenues last quarter, and almost the entire increase in segment profit.

Segment profit of the automotive segment was flat at Rs 131 crore. This isn't a great sign, since the segment accounts for over 60 per cent of total profit.

The markets were lukewarm to M&M's results, with the stock remaining flat on Wednesday. M&M trades at less than 14 times estimated earnings for FY06, and analysts have pointed out that one trigger for a re-rating would be an unlocking of the company's holdings in subsidiaries like its financial services and software companies.

Needless to say, the markets would keenly await the announcement from M&M's financial services subsidiary on Thursday, on the time-frame and size of its IPO. A positive surprise on this front should trigger buying in the stock.