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Tata Steel: good show, but stock overreacts

Tata Steel: good show, but stock overreacts
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First Published: Thu, Jan 28 2010. 10 04 PM IST

Graphics by Yogesh Kumar/Mint
Graphics by Yogesh Kumar/Mint
Updated: Thu, Jan 28 2010. 10 04 PM IST
Tata Steel Ltd’s reported net profit of Rs1,192 crore for the December quarter was more than 20% higher than Street estimates. This led to a 5% jump in the company’s share price after the results were announced on Thursday.
Graphics by Yogesh Kumar/Mint
But it must be noted that higher other income had a large role to play. On a sequential basis, other income jumped 3.5 times to Rs264 crore, contributing to almost 50% of incremental pre-tax profit. Operating profit rose 12.2% to Rs2,157 crore, tracking a similar rise in net sales. According to Bloomberg, consensus estimates of operating profit stood at Rs2,042 crore. While Tata Steel has beaten estimates at the operating profit level, the degree of outperformance is far lower compared to the net profit level.
In fact, there were some negative surprises in terms of cost control. Employee costs rose 14% on a per-tonne basis sequentially. Adjusted for the appreciation in the rupee last quarter, raw material costs rose marginally on a per-tonne basis compared with the September quarter. On Wednesday, Steel Authority of India Ltd (SAIL) had reported a sharp decline in raw material costs. Operating profit rose marginally on a per-tonne basis thanks to a 2.5% increase in average price realization.
Given the pressure on key costs, the 5% rise in the stock looks overdone. Tata Steel’s shares have fallen the most compared with peers SAIL and JSW Steel Ltd from its peak in early 2008. While the share prices of SAIL and JSW are lower by 19% and 26%, respectively, Tata Steel’s share price is down 36.5%. The concern, obviously, is Corus. While the drop in raw material costs and the increase in capacity utilization have improved profitability at the European arm, profit margins are expected to be low.
Credit Suisse points out in a research report dated 30 November 2009: “Despite usage of low cost raw material, Corus made only low positive Ebitda in October 2009 at 75% utilization. As utilization improves to 80-85% in FY11, we expect Corus’ Ebitda to improve to $56 (Rs2,593)/tonne in FY11, but we do not expect significant recovery beyond that.”
Ebitda stands for earnings before interest, taxes, depreciation and amortization and is a reflection of profitability.
Meanwhile, increasing capacity utilization across the globe is leading to excess capacity, which may not only put pressure on steel prices, but is also likely to result in higher prices for iron ore and coking coal. Against this backdrop, the company’s shares may not do much in the near term.
Write to us at marktomarket@livemint.com
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First Published: Thu, Jan 28 2010. 10 04 PM IST