Mumbai :Tata Steel Ltd on Friday warned that uncertain outlook for the global economy will lower demand in the coming quarters even as it reported a near-tripling in consolidated fiscal first quarter net profit, aided mainly by one-time gains.
These came from stake sales in two ventures and a settlement won over a breach of contract at unit Teesside Cast Products.
The world’s seventh-largest steel maker, part of the $67.4 billion (Rs3.06 trillion today) Tata Group, said Europe, where it has two-thirds of its capacity, is expected to face significant uncertainty in the next three-six months. That will result in a slower September quarter than in the previous year due to the US credit rating downgrade and sovereign debt issues in Europe.
Ratings agency Standard and Poor’s downgraded the US for the first time in seven decades due to its public debt of $14.3 trillion, which is set to balloon further.
The steel maker also warned that growth sentiment in key emerging markets is expected to remain muted in the near term, which could result in lower prices for steel.
Managing director H.M. Nerurkar said the company is witnessing definite signs of a slowdown in Europe, because of which it may face shrinking profit margins in the third and fourth quarters.
The $500-billion global steel industry has faced a softening of demand in the past few months, mainly from the construction and automobile sectors, and high coal and iron ore prices have further weighed on profitability.
Posco, the world’s third-largest steel maker, last month warned of weakening demand growth and persistently high input costs in the second half, after posting a 17% fall in quarterly operating profit.
Perhaps reflecting this muted outlook, Tata Steel’s shares were down nearly 29% year-to-date, mirroring the 29% fall in BSE’s 13-stock Metal Index. The benchmark Sensex is down 17% so far in 2011.
The steel maker’s consolidated net profit for the April-June period jumped to Rs5,346.55 crore from Rs1,825.26 crore in the year-ago period. Net sales rose nearly 22% to Rs32,839.90 crore.
The median of 26 analysts’ estimates compiled by Bloomberg was a profit of Rs1,970 crore.
Tata Steel reported one-time gains of Rs576 crore from the sale of stakes in Tata Refractories Ltd and Rs4,942 crore from selling shares in Riversdale Mining Ltd. It got Rs598 crore as compensation from buyers that walked out of a 10-year contract at its Teesside plant in the UK. After adjustments, these exceptional gains worked out to Rs3,882.26 crore for the quarter.
Without these one-time gains, the quarterly consolidated net profit works out to Rs1,375 crore, said Ravindra Deshpande, a metals analyst with Elara Securities (India) Pvt. Ltd, who had estimated a consolidated net profit of Rs1,640 crore, excluding one-time gains. The company’s shares closed 1.7% lower at Rs476.35 apiece, underperforming the 1.3% fall of the Sensex.
On the operations side, earnings didn’t give any positive surprises, Deshpande said. Profit margins will be under pressure in the coming quarters as steel prices are not increasing even as raw material prices remain high.
Quarterly operating profit fell 3.4% to Rs3,272.06 crore after a 25% increase in total costs. Raw material expenses rose 44%, driven by higher coking coal prices. Tata Steel Europe, acquired in 2007, is completely dependent on outside sources for raw materials.
The price of coking coal surged after record rains in Australia’s Queensland region, the world’s largest exporter of the commodity, slowed production. The average coal price rose 66% in the quarter from a year earlier, while iron ore at Tianjin port in China climbed 10% on average.
Tata Steel said combined earnings before interest, tax, depreciation and amortization (Ebitda) margins for the quarter stood at 25%—47% at Indian operations and 9% at European operations. The company has backward linkages for iron ore and some part of coking coal in India, but its European operations are completely dependent on buying inputs on long-term contracts.
Raw material costs for European operations rose 6% from the previous quarter to $512 per tonne.
“Margins will definitely soften in Europe going forward, while Indian realizations will remain flattish,” said Sanjay Jain, a metals analyst with Motilal Oswal Securities Ltd.
Still, high raw material prices and monetary tightening in India remain causes for concern, Nerurkar said.
About 55% of Tata Steel’s Indian portfolio consists of flat products used to make cars and household consumer products such as refrigerators and air conditioners, but the Indian auto industry has recently witnessed a slowdown, with car sales sliding 15.8% in July, the first drop in two-and-a-half years.
Bloomberg and Reuters contributed to this copy.