Tata Steel December Quarter PAT Down By 172 Per Cent

Tata Steel, the world’s sixth-largest steel producer, declared its results on February 9. The consolidated net sales of the company were up by 13 per cent on a YoY basis. This growth in sales is on the back of higher realisation, higher by 15 per cent on a YoY basis aided by 13 per cent YoY rupee depreciation. However, due to inventory write-off worth Rs 741 crore, the company reported net loss of Rs 687 crore against profit of Rs 948 crore in the same period last year.

The sales volume of the company was down by 1 per cent to 5.84 million tonnes. This decline in volumes was on account of the weak European operation. During the quarter under review, the company opted for a production cut of 15-18 per cent from its European plant. The sales volume in Europe was down by 6.2 per cent to 3.35 million tonnes QoQ.

Meanwhile, the operating performance of the company remained quite poor and was down by 44 per cent on a YoY basis to Rs 1,855 crore. This was largely on account of a decline in demand across Europe which forced the company to write off inventory worth Rs 741 crore. The other factors were the higher costs of raw material, power & fuel and freight charges which were up by 22, 21 and 10 per cent on a YoY basis respectively.

The operating margin on a consolidated basis was down by 587 bps to 5.58 per cent on a YoY basis. The EBITDA/tonne of the company declined from USD 319 in the September quarter of 2011 to USD 303 in the December quarter of 2011.

The domestic performance of the company remained subdued but was better than its overseas operations. The stand-alone net sales grew by 13 per cent, largely because of the improvement in sales realisation due to increased retail sales and favorable sales mix of long products. However, the EBITDA margin was down by 17.7 per cent as compared to the consolidated margin which was down by 44 per cent on a YoY basis. This could be attributed to the higher input cost and lower sales volume. The sales volume has declined by 1 per cent on a YoY basis to 1.62 million tonnes.

Over the last six months the company has reported weak numbers due to a fall in demand, higher input cost and rupee depreciation, especially from the European region which is still trying to resolve its debt crisis and where the company generates 62 per cent of its revenues. However, in India the interest rate cycles seem to have peaked out after the RBI’s move to cut down the CRR rate by 50 bps to 5.5 per cent. 

This will provide some relief to the liquidity situation in the country and therefore we believe that the demand may some pick-up in the ongoing quarter. The company’s European operations will continue to cause concern unless some major changes help the economy to move in the upward direction. At present the company is trading at a PE of 5.05x and with its EPS of Rs 96 the valuation looks reasonable. But given the fact that its overseas operations are not on a roll, our recommendation to investors is to avoid the scrip.