Stock Review: TATA STEEL

Tata Steel's consolidated net profit, no doubt, doubled in the December 10 quarter to . 1,003 crore, given a low-base effect a year ago, but it was broadly below the Street's expectations. And while its smaller Indian operations posted an impressive performance in the quarter to December, its European facilities grappled with a rather difficult operating environment. That's because, in Europe, it purchased inputs such as iron ore and coking coal from third parties, which are close to near record levels. The company's consolidated operating profit margin grew about 40 basis points year-on-year to 11.8% in the third quarter, and consolidated net sales grew 11% to . 29,089 crore. The results were declared after the close of trading on Tuesday, but the stock had already declined 0.4% to . 616.6 at the close of the day's trade.

   The impact of high raw material costs and sluggish demand, resulted in the EBITDA (operating profit) of European operations, plummeting nearly 40% year-on-year last quarter. This curtailed the profit growth for the consolidated entity in the third quarter. European sales account for nearly three-fifth of the company's net sales. In Europe, the company managed better realisations on a per-tonne basis in the quarter, but steel sales volume fell 5.9%. And that's attributed to sluggish demand in key user-industries in Europe, like automobiles and the construction sector.

   Going forward, European operations are expected to continue to grapple with rising costs and sluggish demand over the next few quarters. This is because recovery from the recent global financial crisis, especially in Europe, has been rather patchy and steel makers are finding it difficult to pass on higher costs there. However, in the domestic market, the company is well placed to take advantage of strong demand conditions and they should partially help offset the tough operating environment in Europe. Tata Steel trades at a consolidated P/E of 7.9 times on a trailing four-quarter basis.