At Rs 337 cr, Tata Steel PAT down 70% on higher tax outgo

Europe operations offer positive surprise

Tata Steel has posted a 70 per cent year-on-year fall in consolidated net profit for the quarter ended June this year at Rs 337.33 crore, against the Bloomberg estimate of Rs 1,048.5 crore. The decline was primarily due to an exceptional loss of Rs 262 crore, higher tax outgo and the continuing rise in finance costs resulting from ongoing expansions. For the year-ago period, the company had posted a net profit of Rs 1,139 crore.

Analysts say adjusted for the exceptional items, the profit is in line with estimates. While operations in India fared along expected lines, those in Europe surprised positively.

At Rs 1,080 crore, the tax outgo was much higher than the year-ago period’s Rs 351.39 crore, which had seen the company write-back Rs 415 crore in deferred taxes. For the June quarter this year, finance costs stood at Rs 1,252.4 crore, a rise of 26.2 per cent compared to Rs 992.4 crore in the corresponding period last year. Among operational expenses, employee costs were the only ones to have risen faster than sales growth, rising 17.6 per cent year-on-year to Rs 5,634 crore and offsetting some of the gains.

The company’s consolidated sales stood at Rs 36,427 crore, 11 per cent more than in the year-ago period. The Bloomberg consensus estimate for consolidated sales was Rs 35,644.

Tata Steel’s European operations posted earnings before interest, tax, depreciation and amortisation (Ebitda) per tonne of $52, against analysts’ estimates of $44-47. Ebitda per tonne stood at $33 in the March quarter and $44 in the June quarter last year.

The company’s Europe operations witnessed a 20 per cent year-on-year rise in differential product sales. “Cost control, raw material efficiency and a strong pace of new product launches has helped Europe operations this quarter,” said Karl-Ulrich Koehler, chief executive and managing director, Tata Steel Europe.

Tata Steel India’s performance continues to be strong, with Ebitda per tonne at Rs 15,529, against analysts’ estimate of Rs 14,600 and Rs 16,380 in the seasonally strong March quarter of this year. Domestic sales volumes, too, remained strong and, at 2.1 million tonnes (mt), were largely in line with estimates (five per cent higher than two mt in the year-ago period). For the June quarter, Tata Steel India clocked revenue of Rs 10,468 crore, up 10 per cent year-on-year and in line with market expectations of Rs 10,636 crore.

“Strong volume growth in the automobile segment, primarily from the two-wheeler segment, helped push up India revenue,” said T V Narendran, managing director, Tata Steel India and Southeast Asia. “Volume growth of 22 per cent in the branded retail business also supported domestic operations,” he added.

On the net profit front, the company reported exceptional gains of Rs 1,314 crore on account of the Dhamra port stake sale. But this was offset by the impairment loss on one of its coal assets in Mozambique.

“On July 30, 2014, Rio Tinto reached an agreement for the sale of Rio Tinto Coal Mozambique, which included the Benga Project, in which the company had 35 per cent stake. Consequently, the company undertook an impairment review exercise of its investment in the Benga project and the board approved a non-cash write-down of Rs 1,577 crore,” the company said.

The coming quarters could see exceptional gains. “The profit incurred on non-current investments does not include the Borivali plant sale, as some small procedures are still pending and so, the money is yet to come to us,” Koushik Chatterjee, group executive director (finance and corporate), said during the earnings conference call.

For the June quarter, the company has included a loss and a profit item in the exceptional segment. A loss item alone would have dragged the net profit down further, analysts said, adding the profit item (Dhamra stake sale) had provided cushioning.

Nirmal Bang Institutional Equities analyst Giriraj Daga expects the company’s European operations to remain strong. Goutam Chakraborty at Emkay Global says he is positive on the stock, but adds rising raw material prices will pose challenges. Globally, iron ore prices have started inching up of late.

Analysts at Ambit Capital said Tata Steel remained their preferred pick in the steel sector, given its superior margin profile, the rising share of the Indian business in its overall mix and the commissioning of the Odisha plant by the end of this financial year.