But high growth rates are partly due to the low base of last year.
Tata Steel posted slightly better-than-expected standalone numbers for the quarter ended December 31, 2009. Volumes, which were up nearly 50 per cent year-on-year, helped the company post an increase of 33 per cent in net sales at Rs 6,307 crore, while lower costs pushed margins higher and almost doubled profits.
While growth rates appear to be high, they are partly due to the low base of last year, when Tata Steel’s volumes, net sales and profits had fallen over the year-ago quarter. The stock initially reacted positively and closed higher by 4.8 per cent on Thursday, but fell 2.8 per cent the next day, even as the Sensex was up. The relatively lower year-on-year growth in net sales (vis-à-vis volumes) is consequent to the 11 per cent decline in blended realisations to Rs 39,500 per tonne.
Notably, on a per-tonne basis, costs (especially of coking coal) declined across the board, which led to total per tonne costs falling 15 per cent to Rs 26,420. Thus, despite the decline in realisations, for every tonne it sold, Tata Steel earned an operating profit of about Rs 13,100 — a shade lower than profits reported in the quarter ended December 2008. Tata Steel’s standalone operating profits, hence, jumped 46 per cent to Rs 2,157 crore, led by higher volumes, while margins improved by over 300 basis points to 34 per cent.
The company operated at more than the rated capacity in the month of December and produced 0.6 million tonnes (mt) of steel. If these production levels are sustained, the company can produce 7.2 mt of steel annually as against the rated capacity of 6.8 mt. In the present quarter (ending March 2010), the company hopes to sell more than the 1.6 mt of steel it sold in the preceding quarter — it is estimated to be close to the 1.75-mt seen in the quarter ended March 2009.
But, since the company had hiked steel prices in the December quarter, healthy sequential and year-on-year growth in top line are expected in the current quarter. Also, with cost pressure expected to ease, profit margins should remain stable sequentially, but improve on a year-on-year basis.
Its ferro alloys division (about 10 per cent of sales), which had seen profitability reach a trough in the March 2009 quarter, showed consistent improvement since and reported earning before interest and taxation margins of 21.7 per cent. Expect the business to do well on the back of better volumes and prices going forward.
In the December 2009 quarter, though Tata Steel reported gains from sale of investments (about Rs 200 crore), it also wrote off Rs 185 crore on account of debt instruments prematurely extinguished. Also, although interest charges were up 19 per cent, the company had regularly repaid debt. It repaid debt of about Rs 1,600 crore in the quarter, thereby reducing its net debt to Rs 22,000 crore. It hopes to repay a similar amount in the current quarter as well, which should help keep a tab on interest charges.
Finally, Tata Steel’s profit before tax and forex transactions nearly doubled to Rs 1,743 crore. However, a forex loss of Rs 127 crore in last year’s quarter meant that net profit growth was higher at 156 per cent, to Rs 1,192 crore.
Going ahead, while the March 2010 quarter is expected to be as good as the December quarter, volume growth in 2010-11 may not be as robust (estimated at 12-15 per cent); it is expected to look up after the company’s new capacity at Jamshedpur goes on stream around September 2011.
For now, concerns over its European operations (namely, Corus) have also not eased completely. Its prospects will be better known in February, when the company declares its consolidated quarterly numbers. At Rs 569, the stock trades at a PE of 6.8 times its estimated consolidated 2010-11 EPS and leaves little room for upside in the near term.
