Tata Steel reported strong operational numbers on the back margin expansion in Europe
Standalone operations operating profit was marginally lower than estimate due to a jump in other expenditure
Adjusted EBIDTA/ton at Corus stood at US$32 in Q3 FY14, higher than our estimate of US$17/ton on account of lower raw material costs and the various cost saving measures taken by the company
Performance of South East Asia operations remained flat on a qoq basis
Consolidated operating profit growth stood at 78.9% yoy to Rs40bn, higher than our estimate of Rs35bn
Upgrade to BUY post the fourth consecutive strong performance in Europe with a revised price target of Rs433
|(Rs mn)||Q3 FY14||Q3 FY13||% yoy||Q2 FY14||% qoq|
|Power and fuel costs||(14,053)||(14,431)||(2.6)||(15,719)||(10.6)|
|OPM (%)||10.9||7.0||393 bps||10.1||79 bps|
|Effective tax rate (%)||64.2||(283.9)||32.0|
|Other prov / minority etc||37||256||(85.4)||(342)||(110.9)|
|Adj. PAT margin (%)||1.4||(2.3)||368 bps||2.5||(113) bps|
|Extra ordinary items||4||(198)||-||-||-|
|Ann. EPS (Rs)||20.7||(30.6)||-||37.8||(45.2)|
Volume recovery in Europe & South East Asia propel topline by 14.4% yoy
Tata Steel's topline increased 14.4% yoy to Rs367bn; higher than our estimate of Rs349bn. Higher volumes across Europe and South East Asia coupled with higher realisations at Europe led to the outperformance in topline. Standalone Indian operations reported an increase of 9.5% yoy in sales volume to 2.06mn tons. Sales volume at its European operations was higher by 5.6% yoy to 3.19mn tons. Production volumes for the second consecutive quarter were quite strong at 3.91mn tons, higher by 19% yoy. The jump in production was due to the restart of the Port Talbot blast furnace and company getting into new territories to boost sales in a weak season in Europe. Volumes at its South Asian units increased 32.9% yoy and 13.5% qoq to 1.09mn tons. However, production at the South Asian units was impacted by the unrest in the region.
Average blended realizations in India were higher by 0.8% on a qoq in rupee terms as the impact of higher steel prices was offset by a marginal decrease other revenues. During the quarter prices of both flat and long products were higher on a qoq basis. The impact of the price hikes announced by the company in Q3 FY14 would be fully reflected with a lag effect in Q4 FY14. Long product volumes were lower on a qoq basis due to a maintenance shutdown at one of its plants. Realisations in Europe increased by 6.4% qoq in dollar terms from US$984/ton in Q2 FY14 to US$1,047/ton on account of superior product mix and higher realisations in the region. Realizations at its South East Asia operations declined for the second consecutive quarter in dollar terms from US$701/ton in Q2 FY14 and US$814/ton in Q1 FY14 to US$671/ton.
Bottomline growth reduced by a jump in other expenditure
Tata Steel India registered a 16.2% yoy growth in operating profit to Rs29.4bn, marginally lower than our estimate of Rs30.6bn. The underperformance in operating profit was largely due a jump in other expenditure. Employee costs declined for the second consecutive quarter by 7.5% qoq to Rs9bn. Raw material costs per ton decreased from Rs11,500/ton in Q2 FY14 to Rs11,212/ton due to lower prices of landed coking coal costs. Power costs per ton of steel decreased on a qoq basis due to lower thermal coal prices. Other expenditure per ton of steel jumped 10.1% qoq due to the higher forex loss, higher repairs and one-off sales provision included in the quarter. Operating profit per ton for the domestic operations decreased marginally by 1.3% qoq to Rs14,210/ton, marginally lower than our estimate.
Blended per ton cost analysis (Standalone)
|Q3 FY14||Q3 FY13||% yoy||Q2 FY14||% qoq|
|Steel production (mn tons)||2.21||2.07||6.8||2.21||-|
|Steel sales (mn tons)||2.07||1.89||9.3||2.04||1.3|
|Sales as a % of production||93.5||91.3||92.3|
|Net realisations (Rs/ton)||49,097||49,578||(1.0)||48,633||1.0|
|Cost per ton (Rs/ton)|
|Power and fuel costs||3,086||3,304||(6.6)||3,220||(4.2)|
Tata Steel on a consolidated level registered an operating profit of Rs40bn, higher by 78.9% yoy. This was higher than our estimate of Rs35bn due to outperformance in its European operations. During the quarter, European operations registered an adjusted operating profit of US$101mn against our expectations of US$56mn. EBIDTA/ton for European operations stood at US$32/ton, higher than our estimate of US$17. This was due to a decline in raw material costs and the various cost saving initiatives taken by the company. The management expects the recovery in volumes and profitability to remain intact over the next one year on the back of the various cost saving initiatives taken by the company. A recovery in product mix and higher prices in the region led to a 6% qoq increase in realisations. South East operations registered a 6.2% qoq increase in operating profit on the back of higher volumes. Margins remained in check due to high scrap prices and lower steel prices in the region. Steel prices in the region are under pressure due to dumping of steel from China.
|Tata Steel Standalone||Q3 FY14||Q3 FY13||% yoy||Q2 FY14||% qoq|
|Sales volume (mn tons)||2.07||1.89||9.5||2.04||1.5|
|Revenue (Rs mn)||101,430||93,700||8.2||99,210||2.2|
|EBIDTA (Rs mn)||31,310||25,250||24.0||32,020||(2.2)|
|OPM (%)||30.9||26.9||392 bps||32.3||(141) bps|
|Tata Steel UK - Corus||Q3 FY14||Q3 FY13||% yoy||Q2 FY14||% qoq|
|Sales volume (mn tons)||3.19||3.02||5.6||3.46||(7.8)|
|Revenue (Rs mn)||207,090||181,260||14.3||211,490||(2.1)|
|EBIDTA (Rs mn)||8,600||(4,280)||-||5,540||55.2|
|OPM (%)||4.2||(2.4)||651 bps||2.6||153 bps|
|South East Asian operations||Q3 FY14||Q3 FY13||% yoy||Q2 FY14||% qoq|
|Sales volume (mn tons)||1.09||0.82||32.9||0.96||13.5|
|Revenue (Rs mn)||45,370||34,650||30.9||41,790||8.6|
|EBIDTA (Rs mn)||1,370||1,440||(4.9)||1,290||6.2|
|OPM (%)||3.0||4.2||(114) bps||3.1||(7) bps|
Turn around in Corus and strong domestic business would lead to rerating
We believe domestic operations would continue to be the earnings driver for Tata Steel over the next two years. We believe the European operations would continue to register the revival in profitability over the next two years on account of a revival in demand in the region and further cost savings. We expect Tata Steel to report strong earnings over the next two years due to 1) incremental volumes from the Jamshedpur unit in FY15 and commissioning of Kalinganagar operations in FY16 2) impact of restructuring exercise in Europe 3) marginal revival in demand in the European region 4) benefits from overseas raw material projects. Tata Steel remains our preferred pick in the sector on the back of strong performance registered in the last one year and due to the various earnings driver for the company over the next two years. We upgrade our earnings post the fourth consecutive quarter of above average earnings in Europe and also build in the volume guidance given by the company in India. We upgrade the stock to BUY with a revised price target of Rs433.
|Y/e 31 Mar (Rs m)||FY13||FY14E||FY15E||FY16E|
|yoy growth (%)||1.4||8.6||5.4||5.0|
|yoy growth (%)||(231.0)||(151.4)||7.3||62.6|
|Adj. EPS (Rs)||3.4||37.3||40.1||65.1|
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