Stock Review: TATA STEEL

The Street cheered Tata Steel a day after it announced its fourth quarter numbers buttressed by an unexpectedly good performance from its European operations and the sale of its Teesside Cast Products plant in the UK. High raw material costs, however, resulted in margin compression. The company's high dependence on third parties in the Europe continues to remain a concern in the coming months.

The company's consolidated net sales rose 23% yearon-year to . 33,442.7 crore during the fourth quarter, registering the highest growth in the past four quarters. Its consolidated operating profit was up 4% to . 4,557.6 crore, with a 200 basis points decline in the margin. This was mainly on account of higher input costs for which the company had to shell out 51% more than it did in the year-ago period. Amid weak construction environment in Europe, Tata Steel's European division reported a higher-than-expected 9% increase in volumes of 4.13 mt which resulted in 28% sales growth. This division, which contributes more than half of the company's total revenue, does not have any captive resources and is,hence, fully exposed to fluctuations in price of coking coal and iron ore. As a result, its operating profit margin declined by 200 basis points to 7% during the quarter.

In an effort to streamline operations, the company plans to shut down part of a plant in Scunthorpe, England, as the management believes running this facility results in high expenditure. Earlier this year, Tata Steel completed the Teesside Cast Products sale, a slab manufacturing facility, in a deal valuing the business at . 2,091 crore, which has been accounted for in the current quarter.

Volume and sales growth was muted in India during the fourth quarter. Net sales rose 14% over the year-ago period to . 4 crore whereas net profit declined 21% to . 0.9 crore. The outlook for steel makers remains grim in the face of high raw material costs and possible fall in demand from the construction sector during the monsoon season.
At the beginning of the year, the company had raised . 3,480 crore through a follow-on public issue, after which it raised another . 1,500 crore by issuing hybrid perpetual securities. As on March 31, 2011, the company's cash on books stood at . 10,892 crore, whereas its debt was . 60,684 crore. The stock has been declining since January 2011, in line with the broader market. At . 573, it trades at a trailing 12-month price earnings ratio of 7.8.