Tata Steel margins bounce back on lower material costs

Tata Steel margins bounce back on lower material costs
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First Published: Wed, Jul 29 2009. 10 30 PM IST

Updated: Wed, Jul 29 2009. 10 30 PM IST
The June quarter net profit of Tata Steel Ltd fell just marginally short of street estimates, but the company’s shares interestingly fell by a
little more than 6% on Wednesday. A Reuters poll of 11 analysts had estimated a stand-alone net profit of Rs815 crore, while the reported net profit turned out to be just around 3% lower, at Rs790 crore.
Volumes fell by 20% compared with the March quarter, but thanks to an 8% improvement in average realizations, the decline in net revenues was restricted to 13.6%. Note that JSW Steel Ltd had earlier this month reported a drop of 4.4% in average sales realization for the June quarter. Material costs fell by as much as 40%, even though production dropped by only 5%. The gains would have been more but for the fact that the company is still carrying high-cost inventory of coal at last year’s contracted rates.
According to the company management, this inventory (contracted at about $300, or Rs14,550, per tonne) would last until the end of the September quarter. The
Tata Steel shares had more than trebled from its lows in early March. Ahmed Raza Khan / Mint
conversion cost—overheads such as employee costs, power and fuel, freight and other expenditure—rose by around 2% on a per-tonne basis. This is mainly owing to higher power costs and other expenditure. According to the firm, per unit power cost has been stable, but there is a one-time impact owing to prior-period charges accounted for in the June quarter results. Adjusted for this, the overall conversion cost would be at the March quarter levels. Operating profit rose by 20% quarter-on-quarter and pre-tax profit before exceptionals has grown by 28% to Rs1,193 crore. Operating margin rose by nearly 900 basis points quarter-on-quarter owing to lower raw material costs.
Coming to the fall in the company’s shares, they in fact fell in the morning session itself, much before the results were announced in the late afternoon. This could well be a case of profit booking, considering that Tata Steel shares had more than trebled from its lows in early March. With the steel cycle showing signs of improvement, interest in steel stocks has been high. According to a report by Metal Bulletin Inc., prices are expected to rise considerably between July and October. Manufacturers the world over, including Corus, are raising utilization levels to align supply with a expected increase in demand.
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First Published: Wed, Jul 29 2009. 10 30 PM IST