Tata Steel Ltd’s June quarter earnings show some worry lines and some bright spots in its performance. Deliveries from its Indian operations rose by around 14% from a year earlier; and while market prices may have softened, its own per-tonne realizations rose by 9% year-on-year (y-o-y), and were flat sequentially. A better product mix appears to be the key reason for this improvement.
But Tata Steel’s Indian operations’ costs have risen at a faster rate than revenue. As a result, its stand-alone operating profit margin has fallen by around 5 percentage points y-o-y, but is higher by less than 3 percentage points on a sequential basis. In its European operations, margins have improved on a sequential basis, offsetting a 6% increase in raw material costs. But deliveries fell by around 13% as demand in the region slowed unexpectedly.
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Overall, Tata Steel’s consolidated operating margin was flat on a sequential basis, and down by around 3 percentage points y-o-y. Its reported Ebitda (earnings before interest, taxes, depreciation and amortization) nearly doubled y-o-y to $1.9 billion, or Rs 8,600 crore, because of one-time events, including the sale of its stake in Riversdale Mining. Adjusted for that, its Ebitda fell by around 3% to $974 million. Its net profit nearly tripled to around $1.2 billion, again because of one-time items.
The next few quarters will be a bit tough. Government data shows domestic steel consumption has slowed; slower sales of houses and automobiles are worrying signs.
The credit woes of Europe’s economies may affect consumption as well. The world’s biggest steel producer ArcelorMittal expects sales in Europe to improve in the September and December quarters, to compensate for slower demand in the June quarter.
But this view was before the US credit downgrade, and the deepening of Europe’s credit crisis.
On the positive side, Tata Steel’s liquidity position is comfortable, with around $4.5 billion in cash and equivalents, giving it enough leeway to fund business needs without borrowing, or fishing for raw material assets in troubled times.
The proposed restructuring of its European long-products division will result in a one-time charge, but also result in around $200 million in cost savings. In the long run, its capacity expansion plans will deliver growth in India, and its raw material projects will deliver margin expansion overseas.
But these are in the long run, and there is pain lying in wait in the more foreseeable future. Slower economic growth is bad news for basic commodities such as steel. Investors have already voiced their fears: the company’s share price has lost about one-fifth of its value since 25 July. The stock trades at about seven times its 2011-12 consensus earnings estimate. That may appear reasonable; but if steel prices fall, as they might if the economic environment worsens, that earnings estimate itself may be at risk.
Graphic by Ahmed Raza Khan/Mint
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