Tata Steel Ltd (Q3 FY14)

India Infoline News Service | Mumbai |

Tata Steel's topline increased 14.4% yoy to Rs367bn; higher than our estimate of Rs349bn.

CMP Rs390, Target Rs433, Upside 11.1%

  • 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

Result table
(Rs mn) Q3 FY14 Q3 FY13 % yoy Q2 FY14 % qoq
Net sales 367,358 321,071 14.4 366,449 0.2
Material costs (149,145) (139,209) 7.1 (155,270) (3.9)
Power and fuel costs (14,053) (14,431) (2.6) (15,719) (10.6)
Personnel costs (49,860) (47,372) 5.3 (51,709) (3.6)
Other overheads (114,235) (97,670) 17.0 (106,697) 7.1
Operating profit 40,065 22,390 78.9 37,054 8.1
OPM (%) 10.9 7.0 393 bps 10.1 79 bps
Depreciation (15,221) (14,628) 4.1 (14,440) 5.4
Interest (11,084) (10,323) 7.4 (10,666) 3.9
Other income 181 559 (67.6) 2,034 (91.1)
PBT 13,942 (2,003) - 13,981 (0.3)
Tax (8,951) (5,685) 57.4 (4,472) 100.2
Effective tax rate (%) 64.2 (283.9) 32.0
Other prov / minority etc 37 256 (85.4) (342) (110.9)
Adjusted PAT 5,028 (7,432) - 9,168 (45.2)
Adj. PAT margin (%) 1.4 (2.3) 368 bps 2.5 (113) bps
Extra ordinary items 4 (198) - - -
Reported PAT 5,032 (7,630) - 9,168 (45.1)
Ann. EPS (Rs) 20.7 (30.6) - 37.8 (45.2)
Source: Company, India Infoline Research

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)
RM/ton 11,212 12,861 (12.8) 11,500 (2.5)
Staff cost 4,375 4,677 (6.4) 4,791 (8.7)
Power and fuel costs 3,086 3,304 (6.6) 3,220 (4.2)
Other expenditure 16,213 15,371 5.5 14,720 10.1
Total cost 34,886 36,212 (3.7) 34,231 1.9
Operating profit/ton 14,210 13,366 6.3 14,402 (1.3)
Source: Company, India Infoline Research

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.


Company performance
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
Realisation (Rs/ton) 49,000 49,577 (1.2) 48,632 0.8
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
EBIDTA/ton (Rs) 15,126 13,360 13.2 15,696 (3.6)
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)
Realisation (Rs/ton) 64,918 60,020 8.2 61,124 6.2
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
EBIDTA/ton (Rs) 2,696 (1,417) - 1,601 68.4
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
Realisation (Rs/ton) 41,624 42,256 (1.5) 43,531 (4.4)
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
EBIDTA/ton (Rs) 1,257 1,756 (28.4) 1,344 (6.5)
Source: Company, India Infoline Research

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.


Financial Summary
Y/e 31 Mar (Rs m) FY13 FY14E FY15E FY16E
Revenues 1,347,115 1,463,161 1,541,840 1,619,515
yoy growth (%) 1.4 8.6 5.4 5.0
Operating profit 123,211 166,522 176,133 210,229
OPM (%) 9.1 11.4 11.4 13.0
Pre-exceptional PAT 3,322 36,268 38,912 63,272
Reported PAT (70,577) 36,268 38,912 63,272
yoy growth (%) (231.0) (151.4) 7.3 62.6
         
Adj. EPS (Rs) 3.4 37.3 40.1 65.1
P/E (x) 114.1 10.4 9.7 6.0
Price/Book (x) 1.1 1.0 0.9 0.8
EV/EBITDA (x) 7.8 6.2 6.0 4.8
Debt/Equity (x) 1.7 1.8 1.7 1.4
RoE (%) 0.9 10.2 10.1 14.8
RoCE (%) 6.7 10.3 10.3 12.4
Source: Company, India Infoline Research

***Note: This is a NSE Chart

 

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