Tata Steel Q2 consolidated net rises marginally

Tata Steel, the country''s largest private sector steel manufacturer, which recently unveiled an ambitious $8-billion bid for European steel maker Corus, has reported second quarter results, which are below market expectations. Though volume growth for the quarter was impressive, operating margins remained under pressure.

For the quarter ended 30 September 2006, Tata Steel has reported a consolidated net profit of Rs1,139.11 crore, or Rs19.83 per share, after minority interests - an increase of 2.5 per cent over Rs1,111.32 crore, or Rs20.13 per share, for the same quarter of previous year. Consolidated net revenues increased 17.53 per cent to Rs6,008.28 crore from Rs5,112.07 crore a year ago.

For the first quarter ended 30 June, 2006, Tata Steel had reported a consolidated net profit of Rs1,019.18 crore on revenues of Rs5,764.14 crore.

Operating margins expanded by a modest 4.33 per cent over the previous year quarter. Operating margins, excluding other income, declined substantially to 30.8 per cent from 34.7 per cent during the previous year quarter. On a sequential basis, operating margins have improved from 30.21 per cent achieved for the first quarter.

The sharp fall in operating margins was mostly on account of a 30.18 per cent rise in input costs and a 44.14 per cent surge in power costs. Freight and handling expenses increased by 11.18 per cent over the previous year quarter. Staff costs increased 11.06 per cent while other operating expenses went up by 19.82 per cent.

Tata Steel managed to bring down the ash content in domestically mined coal, which led to an increase in usage of domestic coal to 67 per cent of total from 54 per cent last year. Domestic coal is cheaper than imported coal and this has helped in preventing further margin erosion.

It is clear that Tata Steel has so far not been able to achieve significant cost reductions at Singapore-based Natsteel and Thailand-based Millennium Steel, which were acquired over the last couple of years. On a standalone basis, excluding these acquisitions, operating margins of Tata Steel are a much better 35.26 per cent. Any significant margin expansion at its overseas acquisitions would be possible only when Tata Steel can supply them with crude-steel slabs after expanding domestic capacity.

Interest costs for the quarter went up 90.83 per cent to Rs72.61 crore while depreciation charges were higher by 24.79 per cent at Rs246.03 crore. Tax provisions increased modestly by 2.66 per cent over the previous year quarter.

Employee separation expenses (VRS) went up to Rs44.36 crore for the quarter as compared to Rs28.76 crore a year ago.

The bottom line was supported by a 56.31 per cent jump in other income to Rs168.14 crore.

Domestic steel production during the quarter was at 1.26-million tonnes as compared to 1.21-million tonnes a year ago while steel sales increased to 1.19-million tonnes from 1.18-million tonnes for the corresponding period of previous year. Exports declined to $116.99 million from $144.26 million a year ago. The company is targeting a volume growth of 0.5-million tonnes of steel for full year 2006-07 over last year.

Consolidated revenues from the steel business recorded a growth of 17.09 per cent over the previous year quarter. Ferro alloys and minerals revenues expanded at 15.56 per cent while revenues from other businesses increased by 40.68 per cent.

Within the steel business, galvanised products were the best performers with a growth of 45 per cent followed by construction bars at 30 per cent. Cold rolled sheets achieved volume growth of 29 per cent. Revenues from value added branded products increased by 28 per cent.

Tata Steel is planning to acquire the entire issued share capital of Corus Group Plc, at a price of 455 pence per share in cash valuing 100 per cent equity of Corus at around Rs37,286 crore. The acquisition is proposed to be made by Tata Steel UK., a wholly-owned indirect subsidiary of Tata Steel. The proposed acquisition would be financed through equity contribution of around $3.5 billion by Tata Steel and the balance through non-recourse debt on Tata Steel UK to be serviced through the cash flows of Corus.

The Corus acquisition through the scheme of arrangements, already signed by Tata Steel and Corus, is subject to approval of the High Court of Justice in England and Wales and the shareholders of Corus. If Corus shareholders approve the deal and no counter-bids emerge from rival steel companies, the acquisition is expected to be completed by January 2007.