Street sees Tata Steel profits doubling in FY14

Higher volumes, led by recent expansion, cost rationalisation and better realisations from domestic operations, to aid revival

With metal prices low and demand sluggish, talk of a revival in the fortunes of a steel behemoth such as Tata Steel may seem far-fetched. However, the Street believes the fortunes of the company are set to change, even as its European subsidiary, Tata Steel Europe, continues to struggle.

Tata Steel’s total steel volume is expected to fall to 23.4 million tonnes (mt) in FY13, against 24.5 mt in FY11. However, thanks to domestic capacity expansion, the loss in volumes for its European operations, would be compensated and the overall volumes would rise to 25.5 mt in FY14. Higher volumes and the recent rise in steel prices could be key drivers.

Indian operations to the rescue
In terms of profitability, Tata Steel’s domestic business is expected to come to its rescue, despite the fact that Tata Steel Europe accounts for 60 per cent of the company’s sales. At the end of FY13, consolidated net profit is expected to fall to Rs 2,000-2,500 crore, compared with Rs 8,900 crore in 2010-11, primarily owing to a fall in volumes in Europe. According to estimates, volumes between FY11 and FY13 are likely to drop from 14.9 mt to 13.3 mt. Lower prices of steel and realisations in Europe would also contribute to the fall in profitability.

LOOKING AHEAD

• Total volumes are expected to pick up from 23.4 million tonne in FY13 to 25.5 million tonne in FY14
• Domestic volumes to increase from 6.6 million tonne in FY12 to 9.15 million tonne in FY14
• Backed by cost control in the domestic and international operations, operating margins to improve from 9.3% in FY12 to 12.5%
• European Ebitda per tonne to double from $15 in FY12 to $30 in FY14
• Bloomberg consensus estimates suggest consolidated profits to double from about Rs 2,600 crore in FY13 to Rs 4,550 crore in FY14

However many of these issues would ease in the next financial year; the trend of declining profits through the last three financial years, including FY13, would reverse, as profits are expected to more-than-double, according to consensus estimates. Thanks to Indian operations, in FY13, Tata Steel’s domestic volumes are expected to increase by 2.52 mt to 9.15 mt in FY14.

The domestic business can drive growth in more ways than one. The cost factor would also play a big difference — after stabilisation of the new capacities in India, initial costs would decline and economies of scale would improve. Also, the coke oven battery plant, delayed by a quarter, would be operational by the end of the current financial year, leading to cost savings. All these factors would mean an improvement in the operating margins. “We expect Tata Steel’s Indian operations to see 25 per cent Ebitda (earnings before interest, tax, depreciation and amortisation) growth and 27 per cent earnings growth in FY14, driven primarily by higher volume and stable profitability (Ebitda of $290 a tonne in FY14, compared with $283 a tonne in FY13) and stabilisation of operations,” says Alok Kumar Namani of Nomura.

Hopes of a European revival
Analysts believe currently, the Street is discounting the company’s European operations. Antique Stock Broking believes the European business may be able to record normalised Ebitda of $40-45 a tonne, compared with $16 a tonne, which the current stock price implies. The brokerage feels this could improve significantly over the next two to three years, led by improved efficiencies, capacity and cost rationalisation, pickup in demand in Europe and the commencement of mining assets in Canada (iron ore) and Africa (coal). An improvement of $15 a tonne in Ebitda in the European business could add about Rs 1,100 crore to the company’s consolidated operating profits. In FY14, European operation could also see a marginal recovery in volumes at 13.5 mt.

Overall, though it is possible Europe could surprise on the upside, the turnaround is largely expected to be driven by the company’s operations in India.