Tata Steel: Margin woes

Firm raw material costs likely to keep margins under pressure

Tata Steel’s performance in the September quarter was aided by domestic sales, which rose 19 per cent sequentially to 1.66 million tonnes (mt). Meanwhile, lower demand in Europe dragged volumes five per cent sequentially to 3.53 mt. However, the decline was compensated by a seven per cent sequential rise in European realisations at $1,108 a tonne. Hence, consolidated sales for the quarter increased four per cent sequentially and 10.6 per cent year-on-year (y-o-y) to Rs 28,091 crore.

As expected, rising input costs exerted pressure on margins. With increase in coal and iron ore costs, operating profits on the domestic front were affected further by a one-time expense of Rs 106 crore towards employee benefit. Operating margins declined 460 basis points sequentially to 11.1 per cent.

For Tata Steel Europe, operating margins are likely to remain subdued during the third quarter too. Analysts at Motilal Oswal expect margins to improve from the fourth quarter on the back of better pricing prospects and lower raw material costs. Operating margins on the domestic front may be sustained on the back of higher steel prices, which will take care of firm raw material costs, reckon analysts.

Tata Steel continues to work on expansions and mining resources. It is also focusing on improving its balance sheet. The company plans to raise Rs 7,000 crore through equity-related instruments for funding greenfield projects and mining resources (iron ore mines in Canada and coal mines in Mozambique). However, fund-raising may lead to a 10-15 per cent equity dilution. The Jamshedpur expansion to 10 million tonnes per annum (mtpa), likely to be completed by the end of 2011, will help volumes, as mining investments will boost bottom line from 2011-12. Most analysts remain positive on the stock for the long term.