Tata Steel Ltd (Q4 FY14)

India Infoline News Service | Mumbai |

Tata Steel consolidated results were inline with our estimate as the impact of better domestic operations was offset by a somewhat weaker European operations

CMP Rs452, Target Rs503, Upside 11.3%

  • Tata Steel consolidated results were inline with our estimate as the impact of better domestic operations was offset by a somewhat weaker European operations
  • Standalone operations operating profit was quite higher than estimate on the back of higher sales volume and a decline in other expenditure and employee costs
  • Adjusted EBIDTA/ton at Corus stood flat at US$32, lower than our estimate of US$40/ton on account of lower realisations
  • Performance of South East Asia operations remained below par
  • Consolidated operating profit growth stood at Rs50.1bn was higher by 14.7% yoy and 25.1% qoq, inline with our estimate of Rs50.2bn
  • Maintain BUY on expectations of a strong performance in Europe with a revised price target of Rs503

Result table
(Rs mn) Q4 FY14 Q4 FY13 % yoy Q3 FY14 % qoq
Net sales 424,281 346,505 22.4 367,358 15.5
Material costs (191,164) (150,684) 26.9 (149,145) 28.2
Power and fuel costs (15,952) (13,468) 18.4 (14,053) 13.5
Personnel costs (53,639) (48,593) 10.4 (49,860) 7.6
Other overheads (113,415) (90,070) 25.9 (114,235) (0.7)
Operating profit 50,111 43,689 14.7 40,065 25.1
OPM (%) 11.8 12.6 (80) bps 10.9 90 bps
Depreciation (14,719) (14,696) 0.2 (15,221) (3.3)
Interest (11,694) (9,947) 17.6 (11,084) 5.5
Other income 1,117 (679) (264.6) 181 516.4
PBT 24,816 18,368 35.1 13,942 78.0
Tax (13,645) (11,915) 14.5 (8,951) 52.4
Effective tax rate (%) 55.0 64.9 64.2
Other prov / minority etc 37 1,490 (97.5) 37 -
Adjusted PAT 11,208 7,942 41.1 5,028 122.9
Adj. PAT margin (%) 2.6 2.3 35 bps 1.4 127 bps
Extra ordinary items (458) (74,128) (99.4) 4 -
Reported PAT 10,749 (66,186) (116.2) 5,032 113.6
Ann. EPS (Rs) 46.2 32.7 41.1 20.7 122.9
Source: Company, India Infoline Research

Higher sales volume in India offset the impact of weaker steel prices in Europe
Tata Steel’s topline increased 14.4% yoy to Rs424bn; higher than our estimate of Rs408bn. Higher volumes in the domestic and European business coupled with higher contribution from other subsidiaries led to the outperformance in topline. Standalone Indian operations reported an increase of 16.4% yoy in sales volume to 2.41mn tons, aided by some liquidation of previous quarter inventory. Sales volume at its European operations too was aided by some inventory liquidation. Sales volume was higher by 27.6% yoy to 4.07mn tons. Production volumes for the second consecutive quarter were quite strong at 4.04mn tons, higher by 25% yoy. Volumes at its South Asian units remained subdued at 1.07mn tons as the region remains impacted by dumping of cheap Chinese steel into the country.

Average blended realizations in India were higher by 3.2% on a qoq in rupee terms on the back of the price hikes announced by the company at the start of the quarter and Q3 FY14. An increase in share of Value added Products and higher retails sales also led to the outperformance in steel prices. The management expects prices to remain around current levels in the near term. Realisations in Europe declined sharply by 7.4% qoq in dollar terms from US$1,047/ton in Q3 FY14 to US$969/ton due to an increase in discounts to the consumer. The management indicated that spreads had declined from US$190/ton in Q3 FY14 to US$175/ton in Q4 FY14, leading to some pressure on realisations. Realizations at its South East Asia operations declined for the third consecutive quarter in dollar terms from US$788/ton in Q4 FY13 and US$671/ton in Q3 FY14 to US$660/ton. Steel prices in South East Asia were under pressure from the cheaper imports from China.

Higher volume coupled with lower other expenditure led to a 24.4% yoy jump in operating profit
Tata Steel India registered a 24.4% yoy growth in operating profit to Rs41bn, quite higher than our estimate of Rs35bn. The outperformance in operating profit was largely due to higher sales volume and lower other expenditure. Employee costs declined for the second consecutive quarter by 11.8% qoq to Rs8bn due to lower actuarial provisioning. Raw material costs per ton increased from Rs11,212/ton in Q3 FY14 to Rs12,837/ton due to higher consumption of external coke and imported coal. Power costs per ton of steel decreased on a qoq basis due to lower thermal coal prices. Other expenditure per ton of steel declined 8.5% qoq due to no forex loss and one-off sales provision included in Q3 FY14. The impact of the above was marginally offset by an increase in stores and spares and a one-off related to provision for royalty & taxes. Operating profit per ton for the domestic operations increased sharply by 20% qoq to Rs17,049/ton, quite higher than our estimate. EBIDTA/ton was the higher in the last two years. 

Blended per ton cost analysis (Standalone)
Q4 FY14 Q4 FY13 % yoy Q3 FY14 % qoq
Steel production (mn tons) 2.38 2.07 15.0 2.21 7.7
Steel sales (mn tons) 2.41 2.28 5.7 2.07 16.7
Sales as a % of production 101.3 110.1 93.5
Net realisations (Rs/ton) 50,586 47,239 7.1 49,097 3.0
Cost per ton (Rs/ton)
RM/ton 12,837 13,653 (6.0) 11,212 14.5
Staff cost 3,309 4,542 (27.1) 4,375 (24.4)
Power and fuel costs 2,563 2,462 4.1 3,086 (16.9)
Other expenditure 14,828 12,092 22.6 16,213 (8.5)
Total cost 33,537 32,748 2.4 34,886 (3.9)
Operating profit/ton 17,049 14,491 17.6 14,210 20.0
Source: Company, India Infoline Research

Higher volumes at Europe led to an outperformance in operating profit
Tata Steel on a consolidated level registered an operating profit of Rs50bn, higher by 14.7% yoy. This was inline with our estimate as the impact of lower steel realisations was somewhat offset by higher volumes. During the quarter, European operations registered an adjusted operating profit of US$132mn against our expectations of US$171mn. EBIDTA/ton for European operations stood at US$32/ton was flat on a qoq basis, but lower than our estimate of US$45/ton. The impact of lower raw material costs would lower during the quarter. The management expects the full impact of this to be felt in Q1 FY15. Margins were under pressure due to increase in discounts to customers. Spreads had declined to US$174/ton in Q4 FY14 from US$190/ton in Q3 FY14, leading to the pressure on margins. The management expects the margins to improve in Q1 FY15 as the spread has increased back of US$190/ton levels during the quarter. South East operations registered a 41% qoq decrease in operating profit due to lower realisations and pressure from cheap Chinese imports.

Company performance
Tata Steel Standalone Q4 FY14  Q4 FY13 % yoy Q3 FY14 % qoq
Sales volume (mn tons) 2.41 2.28 5.7 2.07 16.4
Realisation (Rs/ton) 50,585 47,241 7.1 49,000 3.2
Revenue (Rs mn) 121,910 107,710 13.2 101,430 20.2
EBIDTA (Rs mn) 40,520 37,140 9.1 31,310 29.4
OPM (%) 33.2 34.5 (124) bps 30.9 237 bps
EBIDTA/ton (Rs) 16,813 16,289 3.2 15,126 11.2
Tata Steel UK - Corus Q4 FY14  Q4 FY13 % yoy Q3 FY14 % qoq
Sales volume (mn tons) 4.07 3.42 19.0 3.19 27.6
Realisation (Rs/ton) 59,892 56,041 6.9 64,918 (7.7)
Revenue (Rs mn) 243,760 191,660 27.2 207,090 17.7
EBIDTA (Rs mn) 8,170 6,130 33.3 8,600 (5.0)
OPM (%) 3.4 3.2 15 bps 4.2 (80) bps
EBIDTA/ton (Rs) 2,007 1,792 12.0 2,696 (25.5)
South East Asian operations Q4 FY14  Q4 FY13 % yoy Q3 FY14 % qoq
Sales volume (mn tons) 1.07 0.80 33.8 1.09 (1.8)
Realisation (Rs/ton) 40,794 43,575 (6.4) 41,624 (2.0)
Revenue (Rs mn) 43,650 34,860 25.2 45,370 (3.8)
EBIDTA (Rs mn) 800 2,240 (64.3) 1,370 (41.6)
OPM (%) 1.8 6.4 (459) bps 3.0 (119) bps
EBIDTA/ton (Rs) 748 2,800 (73.3) 1,257 (40.5)
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. 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 and lower raw material prices 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 maintain our BUY rating on the stock with a revised price target of Rs503.

Financial Summary
Y/e 31 Mar (Rs m) FY13 FY14E FY15E FY16E
Revenues 1,347,115 1,468,835 1,528,050 1,595,712
yoy growth (%) 1.4 9.0 4.0 4.4
Operating profit 123,211 163,727 187,057 202,097
OPM (%) 9.1 11.1 12.2 12.7
Pre-exceptional PAT 3,322 34,886 50,752 60,272
Reported PAT (70,577) 34,886 50,752 60,272
yoy growth (%) - - 45.5 18.8
Adj. EPS (Rs) 3.4 35.9 52.2 62.0
P/E (x) 132.2 12.6 8.7 7.3
Price/Book (x) 1.3 1.2 1.1 1.0
EV/EBITDA (x) 8.3 6.6 5.8 5.1
Debt/Equity (x) 1.7 1.7 1.6 1.3
RoE (%) 0.9 9.8 13.0 13.9
RoCE (%) 6.7 10.1 11.2 11.7
Source: Company, India Infoline Research



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