Tata Steel : Not out of the woods

Tata Steel’s consolidated numbers for the December 2008 quarter may have beaten the Street’s estimates but no one’s convinced the worst is over. The stock rallied by about 6 per cent on Friday but the joy was short-lived with the price coming off by over 7 per cent on Monday. The firm’s UK subsidiary Corus turned in better realisations in the December quarter, despite spot prices being lower, possibly because it was selling at prices contracted in earlier periods.That helped arrest the fall in consolidated net profits to 39 per cent at Rs 814 crore, despite a forex loss of Rs 200 crore and operating losses at NatSteel.

With demand still not picking up — global steel production came off by 24 per cent in January 2009 — and capacity utilisation at just about 60-65 per cent, steel makers probably haven’t seen the worst of the slowdown. Corus CEO Philippe Varin believes demand contraction is unlikely to reverse before June 2009. That’s why production cuts, at his plants could continue well into the next couple of quarters, keeping volumes at 40 per cent below last year’s levels. So, Corus’ revenues could be under more pressure in 2009-10 because volumes will be weaker (they’re tipped to fall about 13 per cent in 2009-10).

Also because 30 per cent of the firm’s output is up for price renegotiation, realisations, which have averaged $1,205 per tonne so far this year, could drop. Currently, prices of hot rolled coils are ruling at $550 per tonne, half the levels seen in August 2008 (source: Bloomberg).

As a result, consolidated sales for Tata Steel, which are estimated to rise by about 25 per cent in 2008-09 to around Rs 1.4 lakh crore, may actually fall by about 20 per cent next year.The fall in net profits, estimated at Rs 8,800 crore this year, though could be sharper next year even though prices of coal are expected to come off. Which is why even though the stock trades at a multiple of 3.3 times estimated 2009-10 earnings, it finds few takers.