Lacklustre outlook for Tata Steel

Lacklustre outlook for Tata Steel
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First Published: Wed, Jan 28 2009. 10 44 PM IST

Updated: Wed, Jan 28 2009. 10 44 PM IST
India’s largest private steel firm, Tata Steel Ltd, has always stood taller than its peers in the industry, thanks to captive iron ore and coal mines, which keep costs under control as well as ensure premium prices.
It is still better off on costs, thanks to its captive mines, but the company’s realizations in the December quarter came as a surprise.
Compared with the September quarter, realizations fell 20.5%. Steel Authority of India Ltd reported on Tuesday that its realizations fell by 18-20% on a quarter-on-quarter basis.
Compared with its public sector peer, Tata Steel has traditionally enjoyed higher realizations owing to a higher proportion of value-added products and lower spot sales.
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It has medium- to long-term contracts with customers, which gave analysts the impression that it would at least be partly insulated from the free fall in steel prices last quarter.
The fall in price realizations, coupled with a 7% drop in production compared with the September quarter, led to a drop of as much 54% in operating profit on a sequential basis.
According to an analyst with a foreign brokerage, the reported operating profit is about 35% lower than his estimates. It’s surprising, then, that Tata Steel’s shares rose by about 3% after the results were announced.
The outlook for Corus isn’t bright either. The company’s UK subsidiary has cut production by about 30% and expects production cuts to continue till at least March because of the slump in global demand for steel. Besides, realizations have fallen sharply in developed markets as well. And unlike Tata Steel, which has access to captive mines, Corus’ profitability will be hit because of the long-term contracts it entered into last year for coal and iron ore.
One positive is that Corus plans to cut costs by rationalizing its workforce; but again, given the enormity of the downturn, that will offset only a small part of the negative impact on Tata Steel.
Needless to say, Tata Steel’s shares have corrected sharply and reflect the lacklustre outlook for the steel industry for both domestic and global markets.
Considering that the industry isn’t expected to recover anytime soon, investors are unlikely to get excited about the stock in a hurry.
Graphics by Paras Jain/Mint
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First Published: Wed, Jan 28 2009. 10 44 PM IST