Shareholder-Value Corroding
On June 27, the Tisco share price dipped below the psychological barrier of Rs 100, hitting Rs 99.50, a eight year low. The sharp reaction was caused by its first quarter performance for 1998-99. However, the stock bounced back and is currently trading at Rs 104. Is it worth a buy now?
Before we move into Tisco's actual problems, a look at its performance. Tisco's net profit dipped by 58.7 per cent to Rs 27.09 crore in first quarter ended June 1998 as against the corresponding period last year. Its net sales declined marginally to Rs 1,352.76 crore. Operating profit dropped 5 per cent to Rs 228 crore. Interest expenses rose 11.2 per cent to Rs 78 crore, depreciation increased 7.05 per cent to Rs 91 crore.
Tisco's current product range consists of a high percentage of semis, which offer less value addition than other products. Also the margins have been hit badly hit by intense competition and dumping from international players. To its credit the company is adapting to the new environment -- to improve its margins it is now concentrating on value added products. It is hiking its hot rolled coil (HRC) capacity to 2 million tonnes per annum (mtpa) from the current 1 mtpa. This HRC expansion project is now expected to commence commercial production by the end of the second quarter of the current year. Analysts say that the benefits of this capacity expansion will start accruing only from the last quarter of 1998-99. However, Tisco might face some problems with capacity mismatch in terms of HRC capacity to CRC as the new CRC capacity is expected to be completed only by December 1999.
Tisco had a product mix with a bias towards longs. It has consciously changed its product mix in favour of flat products in the last three years. From the current year onwards, flats are expected to contribute about 60 per cent of production and longs about 40 per cent. If infrastructure picks up then demand for longs will grow. The reduced dependence on longs may then actually hamper the company's growth.
Apart from steel, Tisco's diversification into tubes and cement is also creating problems. Both these divisions have now become a drag on the bottom line. Though the company plans to sell off these businesses and increase its focus on its core business of steel manufacturing, it is unable to do so because of poor market conditions.
Excess manpower is another factor which is eating into its bottom line. Tisco is tackling this problem but rather slowly by offering voluntarily retirement schemes (VRS). VRS expenses were Rs 37 crore in this first quarter. This cost will help in improving its margins only in the long run.
Tisco has the ability to bounce back, but is largely dependent upon industry fortunes. The industry is currently plagued with excess capacities and poor demand. There seems to be no respite as all major players are setting up new capacities -- Essar's are putting up a 2 mtpa plant, Jindal's are putting up 1.57 mtpa plant, Malvika Steel another 0.6 mtpa plant. This will further worsen the demand supply imbalance and affect the industry badly if demand does not pick. Also, dumping from CIS and Asian countries does not seem to be abating even after the import barriers being brought in the present Budget to protect the industry. Better to avoid the scrip.