Stock Reivew: TATA STEEL

 

Tata Steel, on a consolidated basis, grappled with a rather difficult operating environment in the June 11 quarter given rising cost of key inputs, coupled with sluggish demand conditions at its key European operations. As a result, the company's consolidated operating profit margin declined 290 basis points YoY to 13.4% in the first quarter of FY12, despite its net sales that improved nearly 21.4% in the quarter.

At its European operations, which accounted for nearly 62% of its consolidated net sales in the first quarter of FY12, steel sales volumes fell 2.2% YoY to 3.5 million tonnes in the quarter. And despite a strong improvement in its realisations on a per tonne on a YoY basis, it was not sufficient to cover the purchase of key inputs at considerably higher prices from third parties, for iron ore and coking coal. The company has also highlighted a weakening in its core EBITDA margins on a YoY basis in the June '11 quarter at its European operations. In its standalone operations also, which relates to steel sales and exports from its domestic production facilities, operating margins also weakened on a YoY basis in the June '11 quarter, given a higher cost structure.

However, Tata Steel's consolidated net profit jumped nearly 193% YoY in the first quarter, helped by a surge in other income. This growth in other income was due to the company tendering its entire stake in Riversdale Mining, coupled with selling part of its stake in Tata Refractories In the March '11 quarter as well. Tata Steel had also grappled with a fall in its consolidated operating profit margin on a YoY basis, given a rising cost structure. The Tata Steel stock declined 1.7% to . 476.4 on Friday, and is also hovering just above its 52-week low reached recently, given an uncertain outlook. The underlying operating environment at its European operations remains rather difficult, given the sovereign debt crisis there. Also, analysts remain concerned about the prices of key raw materials for its European operations. And despite some correction, these key input prices remain at elevated levels. In the domestic market also, the first signs of slowdown in key user industries of steel, like auto and housing, has taken some sheen off the growth prospects. However, analysts are carefully optimistic of a pick-up in steel demand in the post monsoon season. The stock trades at a consolidated P/E of 3.7 times on a trailing four-quarter basis and we are neutral on the stock.