Tata Steel Indian Operations Strong Versus European Operation

Tata Steel, the world’s 7th largest steel producing company, yesterday announced its result for the June 2012 quarter. As expected, the European division continues to dent the overall performance of the company while the Indian operations continued to do well against the backdrop of weakening demand and increased competition. In the company’s press release the MD & CEO Kohler of the European division stated that the European steel demand is lower than expected and prices have weakened. And it will continue to seek to mitigate the effects of this with tight cost control and emphasis on increased product differentiation.

On a consolidated basis, the net sales of the company grew by a mere 2 per cent on a YoY basis to Rs 33,547.73 crore. The net profit has taken a huge beating this quarter and is down by 90 per cent on a YoY basis to Rs 517 crore. However, last year company had a one-time gain of Rs 3,361 crore and if we adjust that the net profit is down by 53 per cent on a YoY basis. This fall in the net profit is largely on the back of a fall in the global steel volumes which declined by 7 per cent on a YoY basis to 5.7 million tonnes, hit by the economic slowdown in the European division. But realizations in rupee terms rose by 9 per cent on a YoY basis, which could be partly attributable to the falling rupee value.

However, if we look at the operating performance the lower raw material cost helped the company to keep the margins at decent levels. The EBITDA margin stood at 10.6 per cent, up by 50 bps sequentially. This was on the back of better realization which increased by 8 per cent to Rs 59,642 / tonne and lower raw material prices of coking coal and iron ore. The increase in realisation and lower raw material consumption resulted into a jump in the EBITDA per tonne by Rs 80 on a QoQ basis to Rs 631 per tonne.

The company, on account of the weak European operations, has taken various cost measures to improve the profitability. One of the major initiatives taken in the previous quarter was to improve the product mix and focus on higher margin business. And now that raw material cost has come down from its high and they will further try to improve the margins with tight cost control and emphasis on increased product differentiation.

Though the Consolidated performance was dented by the European division, it was also strongly supported by the Indian operation which has reported better numbers despite weakening domestic demand for the June quarter. The net sales of the Indian operation during the quarter jumped by 13.33 per cent YoY to Rs 8,908 crore while the EBITDA of the company declined by 10.42 per cent YoY to Rs 2,779 crore. This was mainly on account of the flat sales volume and the higher realisation during the quarter. The realisation improved by 13.5 per cent YoY and 5 per cent on a QoQ basis to Rs 56,005 per tonne on the back of a firm domestic steel price during the quarter which was held up due to higher rupee depreciation. However, the operating margin took a beating by only 35 basis points on a QoQ basis due to an increase in the power cost which was up by 19 per cent on a QoQ basis.

Outlook

In conclusion, we believe that the outlook for the steel sector globally will see muted demand growth in 2013. The global steel capacity utilisation remains around 80 per cent, implying significant overcapacity and downward pressure on steel prices. Steel makers are attempting price increases but the falling raw material prices may drag the steel prices further globally.  Also, with the arrival of monsoon there will be further decline in the domestic demand as well.  However, the good thing is that most of the raw material prices have seen a significant decline in last two quarters with iron ore prices falling by 13 per cent in this period, while coking coal prices have fallen by 22.5 per cent since end-June. Falling raw material prices are good for Tata Steel’s European business margins, but with a lag.

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 demand to a larger extent. The situation at present seems to be very uncertain therefore it would be difficult to tell anything on the recovery. However, with the announcement of any stimulus measures in Europe we may see a revival in steel demand.