Tata Steel: United we fall

Poor results from Corus pull down Q3 profits

Lower than expected numbers from steelmaker Corus in the December 2007 quarter have dragged down consolidated profits for parent Tata Steel.

Recurring consolidated profits for Tata Steel, which bought out the Anglo-Dutch Corus in January 2007, fell from Rs 1442 crore the September 2007 quarter to Rs 1,291 crore.

Not surprisingly, the stock lost 6.4 per cent on Wednesday closing at Rs 766 as the street discovered that the consolidated operating margin was down over 200 basis points, pulling down the operating profit by 16.5 per cent to Rs 3,943 crore versus that in the September 2007 quarter.

Corus' revenues failed to live up to expectations. Besides, the firm incurred higher costs partly on account of higher scrap prices and partly because of bigger expenses on staff.

Thus , operating profits turned in by Tata Steel's subsidiaries were disappointing , falling 32 per cent over the September 2007 quarter to Rs 1,846 crore.

Analysts point out that the fall in the operating profit for Corus has been much sharper than that for Arcelor-Mittal's flat carbon steel business, where the fall was just about 6.5 per cent.

Raw material pressures could crimp margins further, say industry watchers. Already iron ore contracts have become more expensive than they were a year back and coking coal too could cost more.

Tata Steel is well-placed with strong linkages to resources like iron ore, but Corus might find it difficult to cope with the cost increases. The two together produce nearly 29 million tonnes of steel annually.

Besides, analysts believe the SPV structure, through which Tata Steel holds shares of Corus, might not turn out to be as tax-effective as anticipated. As such, Tata Steel is expected to post consolidated revenues of Rs 1,15,500 crore and net profits of about Rs 6200 crore in FY08.

However, sales in FY09 might not be significantly higher, say analysts. The Tata Steel stock has lost over 12 per cent since the start of 2008 and could underperform the market.

IIP: Capital offence

The Index of Industrial Production( IIP) was up 5.3 per cent y-o-y in January 2008, considerably lower than the 11.6 per cent reported in January 07 but not so far away from the 7.7 per cent in December 2007.

While that in itself was not too encouraging, the bigger disappointment was the performance of the capital goods sector. The segment turned in a growth of just 2.2 per cent y-o-y in January, 2008, probably the weakest rise in several years.

While there would have been some effect of a high base, the number was nonetheless below expectations. The street however didn't read too much into the numbers: the BSE's capital goods index stayed flat on Wednesday at 14,102. Between April 2007-January 2008 the growth in the capital goods sector has been an encouraging 18.3 per cent.

That's why investors have been betting on the strong growth in this sector: the BSE's capital goods index has risen about 61 cent over the past one year as compared with a 22.5 per cent rise in the Sensex.

Order books of bigger companies such as Larsen & Toubro and Bhel remain strong though a couple of the smaller companies have reported lower than anticipated orders.

Industry watchers believe that capital expenditure remains on track especially in sectors such as power and they say that companies do have adequate resources to fund the projects.

However, the slowdown in the capital goods segment is a worry though one month's numbers may not set the trend.