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Tata Steel’s results do little to lift investors’ spirits

Tata Steel’s results do little to lift investors’ spirits
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First Published: Thu, Nov 10 2011. 11 10 PM IST

Naveen Kumar Saini/Mint
Naveen Kumar Saini/Mint
Updated: Thu, Nov 10 2011. 11 10 PM IST
Tata Steel Ltd reported weak results, as expected, for the September quarter. Consolidated revenue fell 9.3% quarter-on-quarter to $6.7 billion (around Rs 33,370 crore today), but things look a little better in the domestic currency terms, owing to the rupee’s depreciation. In rupee terms, revenue fell by 1.3% sequentially to Rs 32,507 crore.
Naveen Kumar Saini/Mint
Tata Steel Europe reported flat volumes, but posted a drop of almost 6% in revenue owing to falling price realizations. The slowdown in the European economy has hit the construction industry, which is a large customer of European steel makers. To make matters worse, raw material costs continued to rise last quarter, leading to a profit squeeze.
Tata Steel Europe, which accounts for about 65% of the consolidated revenue, reported an earnings before interest, tax, depreciation and amortization (Ebitda) of merely $30 on a per tonne basis, down from more than $70 in the June quarter. Its absolute Ebitda fell nearly 60% to $103 million, at a wafer-thin margin of 2.4% of revenue.
But the sharp drop in profit in the European operations was largely expected—analysts at Emkay Share and Stock Brokers Ltd had even predicted a loss for the September quarter, while UBS AG had said the company will achieve break-even. In that backdrop, the company seems to have done well to manage an Ebitda—a key measure of operating profitability—of more than $100 million.
The negative surprise in the results appears to be a lower-than-expected profit in Indian operations. Tata Steel India reported a 4% increase in volume and a similar growth in revenue to Rs 8,142 crore. But its Ebitda fell by more than 20% owing to rising raw material costs—coking coal, in particular. Ebitda per tonne fell from $440 in the June quarter to $345.5, which is lower than most analysts’ estimates.
UBS, which had among the most bearish estimates, had predicted an Ebitda per tonne of $375 for local operations. Apart from rising raw material costs, Indian operations were also affected by a decrease in dispatches at its ferro alloys division, which was hit by both internal operational issues, as well as lower demand from China.
Tata Steel shares have been languishing this year and the results will do little to lift the spirits of investors. In fact, the outlook continues to be bleak.
In India, with the commissioning of the expanded capacity at Jamshedpur in Jharkhand getting pushed to March 2012, volume estimates may need to be lowered. In Europe, things need to get only slightly worse for the company to slip into losses.
Despite the sharp correction in Tata Steel’s valuations, investors are likely to stay on the sidelines and wait for more clarity on the European steel industry front.
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First Published: Thu, Nov 10 2011. 11 10 PM IST