Tata Steel European Operation Shows Recovery in March 2012 Quarter

Tata Steel, one of the largest integrated steel players in India, has posted better results for the March 2012 quarter as compared to that of the December 2011 quarter. The highlight of the result was the improvement in the operating performance of its European division. The EBITDA of the European unit turned positive at Rs 147.5 crore in the March quarter as against a loss of Rs 778.3 crore in the December quarter. Moreover, the Indian operation continues to report strongly.

On a consolidated basis, the net sales of the company grew by 2.7 per cent QoQ and 0.1 per cent on a YoY basis to Rs 33,860 crore. The consolidated net profit of the company stood at Rs 203.18 crore as against a loss of Rs 687 crore in the December quarter. This was mainly on the back of an increase in the sales volume and the cost measures taken by the company to improve the operating performance during the quarter. The sales volume of the European division increased by 6 per cent to 3.55 million tonnes and the raw material consumption on a per tonne basis went down by USD 45 per tonne on a QoQ basis to USD 463 per tonne. This was due to a fall in the raw material prices as also various cost measures implemented during the quarter.

The increase in sales volume and lower raw material consumption resulted into a jump in the EBITDA per tonne by USD 54 on a QoQ basis to USD 8 per tonne. However, due to weak demand the realisation remained under pressure in Europe and declined by USD 59 per tonne on a QoQ basis to USD 1,132 per tonne. This indicates that certain concerns have still not abated for FY13 mainly due to the uncertain economic environment in Europe. Tata Steel Europe’s MD & CEO, Dr Karl-Ulrich Kohler, said: “The continuing euro zone crisis kept the EU steel demand well below the pre-crisis levels in the March quarter. In 2012 the demand for steel declined by 1.2 per cent and in this challenging situation in Europe the World Steel Organization has projected a modest demand growth of 3.3 per cent in CY12.”

The company, on account of the weak European operations, has taken various cost measures to improve the profitability. One of the major initiatives is to improve the product mix and focus on higher margin business. This will be to focus more on value-added products and reduce the sales of semi-finished products which is a low margin business. Some of the other cost-reducing measures include cutting down production from the lower productive assets and reducing manpower.

In a recent development, on May 3 the company opened the Benga mines in Mozambique which will supply coking coal and thermal coal for its European operations. The company has stated that in FY13 the company will produce 850 KT of coking coal and 200 KT of thermal coal. Moreover, the iron ore mines in Canada are expected to start operations in Q4FY13. These mines will provide partial security of its raw material requirement for its European operations which will further provide cost benefit to the company.

Meanwhile, the net sales of the Indian operation jumped by 13.09 per cent QoQ and 13.65 per cent YoY to Rs 9,479 crore. The net profit grew by 10 per cent on a QoQ basis to Rs 1,560 crore. This was mainly on account of the increase in the sales volume and the realisation during the quarter. The sales volume of the Indian operation grew by 9 per cent QoQ and 3 per cent YoY to 1.77 million tonnes and the realisation improved by 3.5 per cent on a QoQ basis to Rs 53,542 per tonne on the back of an increase in the domestic steel price during the quarter. However, the operating margin improved by only 17 basis points due to an increase in the employee cost which was up by 28 per cent on a QoQ basis. This jump was due to a new wage agreement that entailed higher provisioning.

Jamshedpur Greenfield Plant Starts Operations

The company has completed the expansion of its 2.9 million tonne of steel production unit in Jamshedpur which will start contributing to the revenues in FY13. After the expansion the crude steel producing capacity of Indian operation will stand at 9.7MTPA.

Outlook

In conclusion, we believe that the outlook for the steel sector globally will see modest demand growth in 2013. However, the Indian operations will continue to boost the company’s overall performance coupled with the Greenfield expansion project. We expect a 15 per cent jump in the sales volume to 7.53 million tonnes and the revenue of the Indian operations to jump by 18 per cent on a YoY basis to Rs 41,000 crore for the year ending FY13. As per the World Steel Organization, in 2012 India’s steel use is forecasted to grow by 6.9 per cent to reach 72.5 MT. In 2013, the growth rate is forecast to accelerate to 9.4 per cent on the back of a surge in urbanisation and infrastructure investment.

However, the European operations will remain weak in FY13 on the back of the ongoing debt crisis in the region which will impact the company’s overall performance to some extent. We believe that most of the negatives from the European operations have been factored out in the stock price which is currently available at lower valuation i.e. EV/EBITDA of 5.6 x and have decent upside potential. The growth will be driven from the Indian operation and therefore we recommend our investor’s to hold the stock from a long-term perspective.