While it was expected that Tata Steel Ltd’s December quarter earnings would be weak, the Rs 602.7 crore loss after minority interests that the company reported has come as a huge negative surprise. Tata Steel Europe slipped into losses, partly owing to an inventory write-down, which seems to be a one-off item. But even the profitability of the Indian operations was weak.
Tata Steel Europe is suffering because of the lag effect with which steel prices are rising relative to the rise in raw material costs. It reported an operating loss of $147 million in the December quarter compared with the September quarter, on the back of a 6.2% drop in despatches. In the September quarter, the company’s European operations had managed a profit of $95 million.
The company has written down the value of inventories of raw materials and finished goods at some of its subsidiary companies, especially in Tata Steel Europe, to recognize the fall in market price of these products. The write-down for the quarter ended December 2011 amounts to Rs 741.7 crore, or around $143 million. Excluding this, Tata Steel Europe’s losses will be negligible and more or less in line with the Street estimates. But as much as the inventory write-down is a one-time affair, it has come as a negative surprise and will lead to a cut in earnings estimates.
Tata Steel India’s performance provides no solace either. Its revenue grew 2.1% sequentially on the back of a 4% increase in price realization per tonne to $975. Even so, earnings before interest, tax, depreciation and amortization (Ebitda) fell by 6.7% to $491 million on the back of cost pressure. Thus, operating profit was squeezed both at the Indian and foreign units.
The outlook is kind of mixed as well. The management has indicated that things will turn for the better for the Indian operations, mainly on expectations of the central bank loosening its monetary policy, which the company hopes will drive investment. However, overcapacity could be a factor. Fitch India points out that “about 30 million tonnes of steel capacity is expected to be added in 2012-2013, due to the completion of several brownfield projects”.
On the European front, things are not so clear. Sure, some kinds of steel have had price increases over the past couple of months and there has not been much increase in raw material prices. But there are still concerns over the demand in Europe. China is yet another factor that will throw a kink in the proceedings.
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Quarterly Performance (PDF)