Tata Steel: Heavy metal

Sales growth eludes Tata Steel with its top line falling 1.6%

Tata Steel reported a 11.5 per cent year-on-year fall in its standalone operating profit to Rs 1390.9 crore in Q3 FY06 with a 1.6 per cent fall in net sales, as steel prices came under pressure.

Operating profit margins also declined 433 basis points y-o-y to 37.78 per cent in Q3 FY06. Other expenditure grew at 16 per cent y-o-y, and dented the bottomline.

Although not strictly comparable owing to differences in demand conditions, the company's operating profit margins slipped by 495 basis points over Q2 FY06.

The Tata Steel stock fell 1.75 per cent to Rs 355.8 on Monday. Its steel sales grew 10.5 per cent y-o-y to 1.1 million tonne in the last quarter, but realisations are estimated to have fallen almost 10 per cent y-o-y a tonne.

But compared with Q2 FY06, the company's steel price realisations are more or less flat and that's thanks to its expansion in higher margin steel for the automobile sector.

Steel prices are expected to remain weak in the medium term. The stock trades at a mere 4.5 times estimated FY06 earnings.

Jet: Margins under pressure

Higher expenses on aviation fuel and employees along with losses in international operations have resulted in a sharp fall in Jet Airways' net profit by 53 per cent y-o-y in Q3 FY06.

While revenues were up 22 per cent y-o-y at Rs 1478.25 crore, the EBITDAR (Earnings Before Interest, Depreciation, Tax and Rentals) at Rs 359 crore, was down 12 per cent. As a result, the EBITDAR margin slipped to 24 per cent from 33 per cent in Q3FY05.

Lower aircraft utilisation, primarily owing to a shortage of pilots was one of the reasons for the moderate revenue increase despite it being the peak period for travel.

Around 1,000 flights were cancelled in the quarter and the passenger load factor dropped six percentage points to 70 per cent.

Jet has been unable to pass on the increase in fuel prices (it raised fares twice, in April and October) entirely, due to intense competition.

The management concedes that it does not have adequate pricing power and has been forced to price tickets competitively to protect its market share.

ITC: Blistering revenue growth

Though foods-to-hotel major ITC's sales growth in Q3 FY06 was better than expectations, its performance at operating level did not keep up with its top line growth.

Net sales increased by 37.49 per cent y-o-y in Q3, while operating profit grew by 24.3 per cent. The contribution of non-cigarette business jumped up to 49 per cent in Q3 compared with 44 per cent in Q2 FY06.

Operating margin improved by 87 basis points for the cigarettes business over Q3 FY05, though it was lower than the Q2 FY06 margin.

ITC's expansion in the hotel business is paying rich dividends as segment profit grew 43.4 per cent, and margins improved by 292 basis points.

Other FMCG products and agri business posted good topline growth though on small bases, but their profitability suffers. ITC was affected by higher raw material costs, on account of scaling up the e-choupal network as well as lower margins in tobacco exports.

Without the one-time assistance to contract manufacturers of Rs 45.44 crore, net profit grew by 24.76 per cent y-o-y to Rs 582.27 crore.

FMCG stocks are attracting investors because of the consumption story. The ITC stock trades at about 21 times FY07 EPS.

With contributions from Shobhana Subramanian and Amriteshwar Mathur