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Europe drives Tata Steel’s performance

Europe drives Tata Steel’s performance
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First Published: Wed, May 25 2011. 10 50 PM IST
Updated: Wed, May 25 2011. 10 50 PM IST
Tata Steel Ltd’s European operations have beaten expectations in the March quarter, which was not surprising after ArcelorMittal, too, reported better-than-expected results.
Tata Steel’s European operations sold 4.1 million tonnes of steel during the March quarter, about 18% higher sequentially.
While demand during the December quarter was affected by a seasonal impact due to the winter season, the situation improved in the March quarter. Relatively stable prices and currency-related fluctuations limited the threat from imports. The company has also been focusing more on value-added products.
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The combined effect saw Europe’s Ebitda per tonne rise to $85 (around Rs3,860 today), and $49 adjusting for one-off items. Ebitda is earnings before interest, tax, depreciation and amortization, and is a key measure of profitability.
Reversal in the March quarter of provisions made during the December quarter were the main one-off items. The outlook for its European business in the June quarter continues to appear good. ArcelorMittal had earlier given an upbeat guidance for the quarter.
But pressure from rising raw material prices may feed into higher costs in the forthcoming quarters. On the positive side, while the restructuring of its long products business may result in some one-time charges, the company will improve its operating margins eventually.
Tata Steel’s Indian operations benefited from slightly higher steel prices, while rising raw material prices did not affect the company, since it has captive sources of raw materials.
Its Ebitda per tonne, therefore, improved to about $400 compared with $387 in the previous quarter, while sales rose by about 6% on a sequential basis.
During the year, volume growth in India will be muted because the company is already operating at high utilization levels. After its expansion plans come onstream towards the end of the year, volume growth will give a fillip to growth. Till then, product mix and prices will drive revenue growth.
The company’s global cost control programmes are showing in its financials. In fiscal 2011, for example, though material costs rose higher than revenue did, a 7% fall in staff costs, a 1% reduction in power costs, and a muted 4.3% increase in other expenditure helped margins improve. Freight and handling costs, however, rose by 15%.
The outlook for Tata Steel appears to be positive, especially in Europe. But worries on the macro-front remain: the possibility of weaker economic growth in Europe and effect of higher interest rates in India, for example. The threat to output growth seems low as of now.
All eyes will now be on raw material prices, and if they keep rising, that could cloud the outlook for the stock. The Tata Steel stock is down by about 20% compared with its 52-week high reached in January.
Graphic by Paras Jain/ Mint
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First Published: Wed, May 25 2011. 10 50 PM IST