Tata Steel: Satisfactory performance

The Tata Steel stock came off by 7 per cent on Tuesday with the steel major turning in numbers that were below the Street’s expectations. Analysts had pencilled in an operating profit of close to Rs 2,100 crore for the September 2009 quarter but the company reported an operating profit of Rs 1,922 crore.

Nevertheless, the operating profit margin (opm) at 33.8 per cent was nearly 300 basis points higher than the opm posted in the June 2009 quarter. What helped was lower raw material costs — mainly the cost of coal and raw materials, as a percentage of sales, dipped around 400 basis points sequentially.

Realisations in the September quarter may have been a tad lower than those in the June quarter, possibly because prices of some long products have come off, but the ebitda (earnings before interest, tax, depreciation and amortisation) at Rs 13,200 a tonne has been reasonably good and higher than the ebitda of Rs 12,300 a tonne seen in the June quarter.

Demand in the Indian market is expected to grow at a compounded rate of 12 per cent in the next few years, whereas supply is unlikely to keep pace. Indeed, the country may have to start importing larger quantities post 2012 pushing up prices of steel locally, say industry observers.

Also, Tata Steel’s overseas subsidiary Corus is expected to turn in better numbers going forward. Corus, which has steel-making capacity of around 22 million tonnes, has been badly hit since the steel cycle worsened last year.

However, steel prices are recovering globally and hot-rolled-coil (HRC) prices are expected to average $550 a tonne. With Corus implementing several cost cutting measures, conversion costs are expected to come down by at least 15 per cent by the end of 2010-11 making its operations more efficient. The fortunes of Tata Steel now depend on how soon Corus is back in the black.