Tata Steel Ltd’s European operations have gone from being a drag on margins to becoming a significant contributor to growth.

In the March quarter, Tata Steel Europe’s sales rose by 6% on a sequential basis, while earnings before interest, depreciation, tax and amortization (Ebidta) margins rose by nearly 6 percentage points. As a result, it contributed nearly half of the group’s incremental addition to Ebidta during the quarter.

While Europe was always been a sizeable contributor to sales after Tata Steel bought Corus in 2007, its contribution to profitability is a more recent phenomenon. Average realizations in its European business during the March quarter were up by 3% compared with the preceding quarter. Apart from prices, profitability also improved due to lower costs and a better product mix.

Graphic: Yogesh Kumar/Mint

The steady improvement in Tata Steel’s performance should result in a stronger balance sheet in fiscal 2011. The company lowered its net debt as of March by nearly 11%. Partly due to volatility, Tata Steel is planning to raise funds, both equity and debt, with a 20-year tenure debt issue being planned. In fiscal 2011, growth will come from higher volumes in Europe as capacity utilization is expected to go up to 85% in the first half, against 80% in the preceding period. In India, it has used its modernization programme to improve output, which will continue to drive volumes.

Thus, the outlook for Tata Steel in the current year looks good. A few key factors to watch for are the fragile situation in Europe, input costs and currency movements. Steel prices are estimated to remain steady, especially in Europe. Domestic steel prices have been cut in recent weeks though, which may be due to a sharper hike in earlier months.

So far, Tata Steel Europe has managed to pass on high iron ore and coking coal costs to its customers. Inability to do so in future will affect margins. But for these uncertainties, rising steel consumption, higher prices and lower costs will see Tata Steel do well in fiscal 2011.

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