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Tata Steel 3QFY2012 performance highlights and results update

Contributed by Angel Broking

Tata Steel reported net loss on a consolidated basis during 3QFY2012 due to weak performance from its Tata Steel Europe (TSE) and Southeast Asian operations. Nevertheless, we continue to maintain our positive stance on Tata Steel and recommend Buy on the stock.

Higher realization leads to top-line growth: Tata Steel’s consolidated net sales increased by 13.8% yoy to Rs.33,103cr, above our estimate of Rs.30,992cr, mainly on account of increased average realization in rupee terms. Standalone net sales increased by 12.3% yoy to Rs.8,305cr. Tata Steel India’s average realization/tonne increased by 12.8% yoy to Rs.46,591; however, TSE’s average realization/tonne decreased by 0.6% yoy to US$1,149 on account of subdued demand in Europe. EBITDA/tonne turns negative at TSE: EBITDA/tonne decreased by 7.1% to US$303 in Tata Steel India. TSE’s EBITDA/tonne stood at US$(1) compared to US$25 in 3QFY2011 on account of higher raw-material costs and inventory write-down of US$143mn. Consequently, consolidated EBITDA decreased by 49.9% yoy to Rs.1,717cr. Owing to losses at TSE and Southeast Asian operations, Tata Steel reported net loss of Rs.603cr in 3QFY2012 compared to adjusted PAT of Rs.1,125cr in 3QFY2011 on a consolidated basis.

Valuation: Steel prices rose by ~7.0% in Europe during CY2012, while prices of coking coal have declined over the past three quarters. These factors, coupled with inventory write-down during 3QFY2012, are expected to result in better financial performance at TSE in the coming quarters. Moreover, firm steel prices coupled with the decline in coking coal prices is expected to benefit the profitability of its India operations. We maintain our Buy rating on the stock with a revised SOTP target price of Rs.558.