At one level, Tata Steel Ltd’s September quarter consolidated results will be a disappointment to investors. Sales were up by 9% to Rs25,395 crore over the previous quarter but down 41% over the year-ago period.
But its loss expanded by 21% over the June quarter to Rs2,720 crore and is dismal compared with a profit of Rs4,704 crore a year ago. It explains why the stock closed down by around 3.3%.
Graphics: Sandeep Bhatnagar / Mint
But the non-recurring nature of some expenses, better volumes due to improving demand, benefits of restructuring benefits and projected lowering of debt are positive factors.
A key reason for the decline in profitability has been Tata Steel Europe Ltd’s (TSE) Teesside Cast Products facility, a large steel slab-making unit, which suffered losses because some key buyers reneged on their contracts. The firm, as a result, had to sell part of its output in the market at a loss. This lowered the group’s earnings before interest, depreciation and tax by $170 million, or Rs787 crore.
The charge in the June quarter due to this event was Rs230 crore. TSE will mothball this facility if the situation does not improve by March 2010. So it may impact Tata Steel’s performance in the second half, too.
In addition, restructuring and impairment costs, some of which are related to layoffs, amounted to $180 million, at the profit-before-tax level. Tata Steel expects the magnitude to be lower in future quarters.
So, where are the improvements visible? Tata Steel’s operating profits in the September quarter are at Rs372 crore, compared with an operating loss of Rs30 crore in the preceding quarter. Underlying earnings before interest, taxes, depreciation and amortization (Ebitda) is at around Rs1,180 crore compared with Rs427 crore.
These are on account of higher volumes. TSE operated at about 75% utilization compared with 53% in the June quarter. Though price realizations were down, cost efficiencies and benefits from restructuring have led to improved margins. The company also said that TSE reported a small profit at the operating level in October.
In the second half of fiscal 2010, Tata Steel’s Indian and Southeast Asian operations expect to benefit from higher demand, lower production costs and stable prices. TSE expects higher capacity utilisation, stable selling prices, lower raw material costs and cost savings of around $144 million through restructuring. A key assumption in TSE performing well is Teesside’s operations stabilizing.
Barring the hits from one-off items, the outlook for Tata Steel seems a little improved. On the non-operational front, Tata Steel is planning to reduce its $12.9 billion debt by around $2 billion in 12 months. It will use existing cash balances, inflows from selling off non-core assets and raise further capital.
These will do their bit to ease the pressure on earnings but the key to Tata Steel’s performance is TSE, which contributes to 66% of overall revenues. If the improvement seen in October is a trend, the second half will be much better than the first half.
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