Q2 show: Tata Steel beats expectations, net up 50.13%

Q2 show: Tata Steel beats expectations, net up 50.13%

Mumbai: Tata Steel Ltd, India’s largest private sector steel maker, beat market expectations to record a 50.13% rise in quarterly profits as it sold more value-added steel products such as galvanized steel and cold rolled products.

Net profit for the second quarter ended 30 September, excluding the company’s Anglo-Dutch unit Corus Group Plc., increased to Rs1,787.81 crore from Rs1,190.83 crore a year earlier, as sales surged 42.73% to Rs6,744.16 crore.

Five analysts polled by Bloomberg had on average forecast net profit of Rs1,650 crore for the second quarter.

“It (profit) is higher than what we expected. This is because other income has gone up, operating profit has increased 3%, and tax rate is pegged at 30% instead of the 33% we had expected," said Rakesh Arora, associate director, Macquarie Securities. “In the last quarter, the company had paid 35% tax."

The firm’s other income, or non-core income, increased to Rs238.37 crore from Rs80.51 crore a year ago.

After announcing its results, the company said it would increase production from the next quarter as fresh capacities kick in. Tata Steel will add 300,000 tonnes of steel-making capacity, increasing its total capacity to 6.8 million tonnes as planned, chief operating officer H.M. Nerurkar said.

Tata Steel also said prices would drop by Rs3,000-4,000 per tonne in October-November as commodity prices has fallen globally, but this would not hurt margins.

The company, which got exposed to foreign loans in 2006-07 for its Corus acquisition, dismissed fears that it would be affected by the current global credit crisis.

“We are well-funded and well-capitalized. We are sitting on liquid funds," Koushik Chatterjee, group chief financial officer, said. “We have enough for the short term, the credit lines are in place, (and) the underlying credit quality has not changed since the last two months."

Tata Steel shares have been pounded at the stock bourses along with other metal stocks this year, with the company shedding 80.93% of its value since 1 January, when it started at Rs934.80.

On Friday, Tata Steel shares fell 14% to Rs178.30 on the Bombay Stock Exchange (BSE), after dropping to a year’s low of Rs174.15 earlier in the day. In October alone, Tata Steel shares have shed 58.11% from Rs425.60 per share at the beginning of the month. This is more a reflection of declining metal prices and overall selling pressure from abroad.

The BSE Metal index has lost 78.05% this year, while the benchmark Sensex index has dropped 57.11%. On Friday, the Sensex lost almost 11% to end at 8.701.07 points.

Tata Steel’s earnings before interest, tax, depreciation and amortisation (Ebitda), a key measure of operational performance, rose to Rs3,421 crore from Rs2,050 crore in the last year, and Rs3,037 crore in the June quarter.

“The Ebitda of Rs28,000 per tonne of steel is the highest Ebitda we have achieved so far," said Chatterjee.

The company, considered to be one of the lowest-cost producers of steel, has been working on cutting costs further, especially its working capital requirements. “Our average debtors have come down in number of days from 13 days to 10 days, and our inventory has gone down from 45 days to 40 days," Chatterjee said.

On whether the steel maker is financially stressed after its purchase of Corus group, the CFO said the firm has invested Rs1,000 crore in the first half.

Corus Group, the foreign unit that is three times the size of Tata Steel, had reported production cuts recently as a result of the global slowdown. Its results will be announced by end November.

Tata Steel, however, has been conservative and taken several steps to cut risks. It has prepaid about 10% of the loans in Tata Steel UK in the first six months of this calendar year, said Chatterjee.

Of the £3 billion (about Rs23,195 crore) term loan taken for Corus, the company has pre-paid £300 million in the first six months from the excess cash it held, he added.

“We have prepaid in a manner that the next repayment has to be made by December 2009, (so) we don’t have a significant principal prepayment obligation...there are no short-term or even medium-term repayment risks as far as Corus is concerned," Chatterjee said.

On the Corus pension fund, Chatterjee revealed that in the June quarter, the fund had a surplus of £690 million. “... it will be at least £100 million higher (for the September quarter)," he added.

The company reported a total notional exchange loss of Rs599.81 crore for the first half of fiscal 2009, including Rs345.62 crore for the quarter, on convertible alternate reference securities (CARS) issued in September 2007.

“The forex loss is just a notional loss," Chatterjee explained. “We have hedged all the foreign exposure in the Tata Steel balance sheet. As far as as CARS are concerned, these are convertible bonds. This will be converted after 2011 and are not hedged because we are of the view that this will be converted," Chatterjee added. “We have almost 3.5 years to go."