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Fitch revises outlook on Tata Steel & Tata Steel UK to negative
Fitch Ratings has revised the Outlook on India-based Tata Steel Limited (TSL) and Tata Steel UK Holdings Limited (TSUKH) to Negative from Stable. Fitch has affirmed TSL's Long-Term Foreign Currency Issuer Default Rating (FC IDR) at 'BB+' and its National Long-Term Rating at 'Fitch AA(ind)'. TSUKH's FC IDR has been affirmed at 'B+'. A list additional rating actions is provided at the end of this commentary.
The Outlook revision reflects Fitch's view that profitability pressures will remain for TSL and TSUKH given the challenging short-term outlook for the global steel market. In FY12 (year end March), consolidated EBITDA margins fell to 9.3% (FY11: 13.5%) driven by the challenging operating environment. Thus, net financial leverage (net debt/ operating EBITDAR) increased to 4.27x (FY11: 3.25x), beyond Fitch's negative rating guideline of 4x. Leverage is likely to remain around the current levels during FY13 before improving in FY14 on the back of volume growth in Indian operations and an improvement in operations at TSUKH.
In FY12, TSUKH's performance deteriorated with the entity recording operating losses in two quarters. The company reported a fall in EBITDA margins to around 2% in FY12 from around 6% in FY11. Fitch notes that TSUKH has taken various initiatives to improve its profitability, like improving operational efficiencies, upgrading facilities & technology and rationalising capacities, focusing on a higher value-added product mix and improving supply chain management. Fitch however expects TSUKH's profitability to remain volatile due to fluctuations in raw material prices and the prevailing weak steel markets in Europe
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Fitch expects the steel demand in India to be impacted in the near term due to the slowing demand growth in various end-user industries. Also, TSL is likely to drive only partial benefit from its additional 2.9mtpa brownfield capacity during FY13, with full benefits expected to accrue from FY14. While TSL's Indian operations will continue to benefit from raw material integration, any significant and sustained drop in steel prices may have a negative impact on the performance of the consolidated entity.
Coal India production to touch 615 MT by FY17
The coal production from CIL has increased from 360.92 Mt in 2006-07, the terminal year of the X Five Year Plan to 435.84 Mt. in 2011-12, the terminal year of the XI Five Year Plan. It is envisaged to reach 615 Mt. in 2016-17, the terminal year of XII FYP.
This was informed by Pratik Prakashbapu Patil, Minister of State in the Ministry of Coal while replying a written question in Rajya Sabha.
The Minister said that endeavour is being made to enhance coal production through taking up of new projects in PSU coal companies and development of captive blocks allotted to both private and PSUs companies. Further import of coal are also resorted to meet the shortage.
In Focus Stories
IIFL recommends ' Add' on Tata Steel
IIFL Institutional Equities, a part of the IIFL Group, one of the leading players in the Indian financial services space, recommends “Add ” Tata Steel.
According to IIFL report, Tata Steel’s 1QFY13 consolidated Ebitda of Rs34bn (up 7% QoQ but down 23% YoY) missed our estimate by 3.6%. Profitability of domestic operations was below our estimate but that of Tata Steel Europe (TSE) marginally exceeded our estimate. Tata Steel’s profit at Rs6bn was 6% below our estimate.
Earnings outlook for 2Q is challenging as lower prices would affect profitability. Also, subdued demand would hurt TSE’s performance.In 2H, profitability is set to improve, as domestic volumes increase ~30% and costs decline. TSE would benefit from rebuilding of Port Talbot and restructuring of the long products division, reports stated.
After a 15% decline in steel prices, spreads (price minus raw material cost) have halved and are unsustainably low. In the last fortnight, scrap prices, theleading indicator of steel price, have inched up.
At 5.1x FY14ii EV/Ebitda, the stock’s valuation already builds in concerns on European operations. A likely recovery in steel prices would lend visibility to earnings. We retain ADD, brokerage added.
The report was published by IIFL’s Institutional Equities Research desk.
Domestic News
Coal India Q1 net profit at Rs44.69bn
Coal India Ltd has posted results for the first quarter ended 30th June, 2012.
Its net profit was stood at Rs44.69bn.
Total Income has increased from Rs. 160657.10 mn for the quarter ended June 30, 2011 to Rs. 185719.60 mn for the quarter ended June 30, 2012.
Tata Steel Q1 cons net profit at Rs5978.80 mn
Tata Steel Ltd has posted a net profit after taxes, Minority Interest and Share of profit of Associates of Rs. 5978.80 mn for the quarter ended June 30, 2012 as compared to Rs. 53465.50 mn for the quarter ended June 30, 2011.
Total Income has increased from Rs. 337614.20 mn for the quarter ended June 30, 2011 to Rs. 341105.80 mn for the quarter ended June 30, 2012.
Fitch affirms Uttam Galva at 'Fitch A(ind)'; Outlook negative
Fitch Ratings has revised India-based Uttam Galva Steels Ltd.'s (UGSL) Outlook to Negative from Stable. Its National Long-Term rating has been affirmed at 'Fitch A(ind)'. A list of additional rating actions is provided at the end of this commentary.
The Outlook revision reflects UGSL's continuing high financial leverage levels of above 4x (FY12 (year end March): 5x, FY11: 4.9x) due to its higher debt levels (Rs. 27.97bn, Rs. 22.71bn). This is driven by its debt-led capex of INR6.2bn towards addition of downstream production facilities, technological and other process improvements and de-bottlenecking existing facilities.
Fitch notes that while FY12 financial leverage has exceeded the negative guideline of 4.0x, the improved production facilities will lead to an improvement in the business profile of the company. This, according to the agency, is expected to help UGSL mitigate profitability pressures during FY13 and contribute to higher profitability thereafter. Fitch expects UGSL's net financial leverage to improve in FY13 to below 4.5x and hereafter to below 4x levels driven by its strong profitability supported by an improving business profile and absence of any large capex.
Hindalco Q1 net profit at Rs. 4247.70 mn
Hindalco Industries Ltd has posted a net profit of Rs. 4247.70 mn for the quarter ended June 30, 2012 as compared to Rs. 6440.00 mn for the quarter ended June 30, 2011.
Total Income has increased from Rs. 62095.70 mn for the quarter ended June 30, 2011 to Rs. 63293.70 mn for the quarter ended June 30, 2012.
Says Mr. D. Bhattacharya, Managing Director, Hindalco and Vice Chairman, Novelis – “It has been an extremely challenging quarter. The LME for aluminium went down 24% year-on-year. This was further compounded by grid problems and the cyclonic weather at Hirakud, coupled with drought conditions at Muri. The surge in input costs such as coal, caustic soda and carbon products further pared earnings by nearly Rs. 200 crores. Despite this PBITDA stood at Rs. 765 crores. Revenue from operations was sustained at Rs. 6028 crores”.
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