Stock Review: TATA STEEL

The Street gave a thumbs up to the December quarter performance (doubling of consolidated profits year-onyear) of Tata Steel by pushing up the scrip 4 per cent. With the operational turnaround led by domestic operations and the global steel outlook improving, most analysts are now confident about its prospects and have a buy rating on the scrip. The company is expected to turn in profits this year as well as the next compared to the losses it posted in the financial year 200910. Also, the stock at the current price of Rs 641 per share is trading at a reasonable nine times its financial year 2011-12 estimated earnings.

Along expectations

Despite subdued performance of the European and South East Asian business, Tata Steel's consolidated net profit jumped 112 per cent to Rs 1,003-crore on the back of a 10 per cent growth in sales at Rs 28,606-crore as compared to the year ago quarter. Better performance was largely helped by the domestic business where volumes grew 2.5 per cent to 1.64 million tonnes (mt) in the December quarter and realisations improved by 14.4 per cent to Rs 45,188 per tonne due to higher steel prices.

The company's standalone Ebitda per tonne improved 19 per cent to $387 per tonne in the December quarter. On the contrary, Corus reported a 6 per cent decline in volumes at 3.47 million tonnes and Ebitda per tonne fell to almost half from $40 to $25 per tonne in the December quarter. This is partly attributed to lower capacity utilisation at Corus at 70-75 per cent compared to 81 per cent last year.

Better prospects ahead

With steel prices expected to improve marginally over the next two years primarily led by demand and cost pressures, Tata Steel remains in a strong position. This is on the back of its scale of operations, ongoing expansion and benefits accruing on the raw material side once its new international mines go on stream over the next two years.

By December 2011, the company will expand its domestic steel producing capacity by 2.9 mt to 9.7 mt, which could add eight per cent to its consolidated volumes and Rs 9,00010,000 crore to consolidated revenues. More importantly, due to high margins in the domestic business, the operating margins are likely to nearly double from 7.9 per cent in 2009-10 to 14.6 per cent by the end of the financial year 2011-12 leading to ahigher growth in profits. Analysts expect the company to report net profits to the tune of Rs 6,200 crore this financial year and Rs 7,000 crore next year as against the net loss of Rs 3,300 crore in the financial year 200910. However, investors also need to keep an eye on steel prices and performance of its European subsidiary.