Tata Steel: Bottomline rises with prices

Tata Steel June numbers have handily beaten estimates

Tata Steel's June quarterly results have beaten even the most optimistic estimates. Profits before tax and exceptional items grew at a stupendous 159 per cent year-on-year to reach Rs 1222.91 crore in the June quarter.

Practically the entire growth in revenue is on account of higher steel prices, since sales volumes of steel have grown only marginally. Revenues have risen 40 per cent.

Clearly, the much-anticipated price pressure on account of a Chinese slowdown has not materialised. And even if the effect of a slowdown does make its presence felt, Tata Steel has been aggressively trying to expand its geographical export base and increasing focus on domestic sales.

The management has been aggressive in ensuring price realisations do not taper sharply ""- it is understood that the company is taking steps to significantly reduce output sold on spot prices.

Like earlier quarters, input costs of the company have been in check due to the company's sourcing key inputs like iron ore from captive facilities.

As a result, operating profits of the company have grown 107.6 per cent to Rs 1401.97 crore in the June quarter and operating profit margins rose 1439 basis points to 44.3 per cent.

Going forward, operating margins are expected to improve further with initiatives to lower costs such as its plan to modernise / upgrade its blast furnace. Moreover, in view of large capex plans by Indian companies, local steel prices are likely to stay buoyant, benefiting the company.

PSBs'treasury income

For some public sector banks, rising bond yields have had little effect on their treasury income. For example, Allahabad Bank's 102 per cent rise in net profits has been buttressed by a 97 per cent growth in other income, with "investment trading profit" constituting the bulk of that "other income". Income from treasury operations still accounts for the bulk of the profits at Allahabad Bank.

Union Bank of India posted a relatively sedate 32 per cent rise in its net profit in the first quarter to Rs 210.40 crore. However, profits on sale of investments were Rs 118.27 crore, a big jump from the Rs 30.7 crore notched up during Q1 last year.

The results underline the fact that while the days of easy trading income in an environment of falling interest rates are over, public sector banks still sit on massive investment portfolios picked up years ago, which translate into substantial unrealised gains.

Interest rates have not yet hardened to the point where these gains no longer exist. Hence, as the Union Bank chairman has reportedly said, it's better to sell these investments before these gains are wiped out.

The flip side of that strategy, of course, is that income from these bonds is no longer available to the bank. Nevertheless, the gains can be seen by Allahabad Bank's using these profits to make additional provisions and reduce its net NPAs to a very commendable 1.69 per cent.

Tata Consultancy Services public issue

The TCS public issue is slightly different from other floats. The money generated from the fresh equity issue will be used to pay its promoter company, Tata Sons (90 per cent holding prior to the offer), a purchase consideration of Rs 2300 crore for the transfer of all assets and liabilities of Tata Sons pertaining to the TCS division.

In fact, the fresh issue will garner Rs 2,000 crore (net of expenses), if it is subscribed at Rs 900, the higher end of the price band. Cash equivalents as at the end of March 31, 2004 stood at Rs 157 crore, which means there would be a shortfall. As a result, TCS will have to dig into cash generated from operations in the June quarter to pay the purchase consideration.

The net result of all this is that when an investor buys a TCS share, he buys into a company that has practically no cash on its books.

Is this important? It makes sense to look at how things are at Infosys, since TCS's float price is largely benchmarked against Infy. Infy has hoarded cash worth Rs 2152 crore, or Rs 80 per share till June 30, 2004. Except for the special dividend earlier this year, it has restricted dividend payout at less than 20 per cent of profit.

The company has always said that the cash is for strategic reasons (mainly acquisitions), and as the company grows, the need for cash/liquidity also grows. With minimal cash on its books, TCS loses out compared to Infy.

The price - book value of TCS works out to as much as 37 times compared to 12 times for Infy. Also, adjusted for the cash of Rs 80 per share, Infy trades at less than 22 times FY05 earnings, the same as TCS (at Rs 900 per share). The IPO pricing is indeed aggressive.

With contributions from Amriteshwar Mathur and Mobis Philipose.