Tata Steel: Disappointing performance

The losses can be attributed to costlier raw material, higher restructuring cost and operating pressure at its Teesside operations.

Tata Steel shares tumbled almost 6 per cent to Rs 529.15 today as the company reported a consolidated loss of Rs 2,720 crore for the September quarter, which was significantly higher than the loss of Rs 1,200 crore estimated by analysts.

Consolidated loss per share stood at Rs 64.58 for the six months ended September 2009. Falling steel prices and lower volumes led to a 43 per cent decline in Tata Steel’s consolidated net sales to Rs 25,395 crore.

The losses can be attributed to costlier raw material, higher restructuring cost and operating pressure at its Teesside operations. Teesside Cast Products (TCP), which contributed almost 35 per cent of the consolidated losses during the first half of the current financial year, lost all its long-term customers, who cancelled their purchase contracts with the company due to the sharp fall in prices and lower demand.

Going ahead, Tata Steel’s management expects the business environment to improve and hopes to report a turnaround in its performance in the second half of the financial year. Cost of production is expected to be lower consequent to depletion of high-cost raw material inventory, whereas new purchases are being done at lower prices.

The company reported an improvement in capacity utilisation to 75 per cent from 53 per cent in the June quarter, which saw its sales deliveries rise to 3.9 million tonnes from 3.2 million tonnes on the back of higher demand from the construction sector in the European markets. The improving capacity utilisation level should also add to its gains on account of economies of scale in the coming quarters.

On the demand front, the management believes that South East Asia and Indian markets are growing, whereas the European and the US markets are stabilising. In the coming quarters, the company will also benefit from its plan to prepay about $2 billion debt.

Its overall performance is, therefore, expected to improve in the second half of the current financial year, which analysts say will help reduce the loss to Rs 15-20 per share for the full year.