TATA Steel reported Q1FY13 results largely in line with our estimates.
Some key highlights from the conference call are as follows:
Net debt increased on account of higher capex, inventory accruals
and revaluation impact
TATA Steel’s net debt increased to USD9.7bn from USD8.6bn at the end
of March 2012 (Gross debt increased from USD10.7bn to USD11.7bn).
The company attributed the increase to: 1) capex of USD641mn in
Q1FY13 (for the full year, the target capex is USD2-2.3bn), and
2) revaluation impact of USD482mn. Inventory has gone up by
USD480mn – as per stock increase in the P&L account.
The company generated consolidated cash flow of close to USD500mn
and a net debt increase of USD1.1bn – so a combination of the above
three factors explain the total cash outflow.
Indian expansion on track for production from Q3FY13
TATA Steel has started the blast furnace (BF) operations – the new blast
furnace produced close to 0.6mn tonnes during Q1FY13. However, this
was masked by maintenance shutdown at older BF and hence there is
no perceptible increase in hot metal production.
The company has said that this was deliberate given coke oven batteries
have not yet been commissioned and this should be completed by
Q3FY13. The company maintained its guidance of a 1mn tonne increase
in volumes in FY13 – in line with our estimates.
Indian volumes were impacted by power issues
TATA Steel’s volumes were impacted by power outages during Q1FY13
as bar mills and cold rolled mills were affected by power shortages.
Therefore, despite producing higher hot metal volumes, this didn’t
translate into sales volume. The company hopes to make up for it from
the next quarter.
European operations: looking at a tough 2 quarters ahead, outlook
should improve in Q4FY12
TATA Steel guided for a better H2FY13 – however, management also
said that the next two quarters are looking tough. The company has seen
prices falling in June and July, however, raw material prices have also
come off.
The focus would be on maintaining contribution margin (steel realizationraw
material prices) and the company hopes to see an improvement in
contribution margin from Q3FY13. With volumes expected to rebound in
Q4 on account of seasonal factors and cost benefits of the Port Talbot
BF rebuilding, EBITDA should rebound, according to management.
Orissa expansion: started spending on the projects but it’s at the early
stages. No debt taken yet. Total project cost of INR400bn for 6mn
tonne expansion – 2 phases of 3mtpa each.
Benga coal mines have started deliveries – the profit from this venture
to be recorded as share of associates
Blended steel realizations increased by INR2400/t vs our estimates of
flat QoQ.
TATA Steel reported inventory accretion of INR5bn in Q1FY13; this is
in line with other companies also seeing inventory increase. While the
company has attributed lower sales to power outages, this also
highlights slightly weaker demand conditions in India, but we would get
back with more details on this.
Power and fuel costs increased sharply by18% QoQ as well as YoY;
the company attributed it to the power shortage scenario and external
purchases.
Other expenditure at INR22.3bn – please note that TATA Steel
accounts for forex losses in other expenses and not extraordinary
losses; we had estimates of INR20bn of other expenses and INR2bn
of forex losses separately: adjusted, costs are in line with our
estimates.
EBITDA at INR27.8bn vs our estimate of INR26.8bn (adjusted for
forex loss of INR2bn) – EBITDA/t at INR17,500/t – the company has
been able to maintain profitability on account of sharply higher
realizations.
Net profit at INR13.6bn was marginally below our estimates, though
PBT at INR21.2bn (vs our estimate of INR21.3bn) was in line. Tax rate
at 36% was much higher than the company’s usual rate of 31%. The
higher tax rate was primarily on account of deferred tax.
European operations
EBITDA at USD35/t vs our estimate of 30/t – driven primarily by
realization increase of USD40/t QoQ.
Total EBITDA at USD111mn – vs our estimate of USD96mn, however
key to watch would be the next two quarters, where we expect to see:
1) a drop in realizations and 2) seasonally weak quarters.
For ex-India operations, employee costs are down to USD705mn from
USD745mn in Q4FY12; most other costs are also in line with our
estimates. Other expenses were up sharply to USD939mn from
USD839mn in Q4FY12.
SE Asian operations
No major change: EBITDA/t at USD24/t, total EBITDA of USD17mn;
flat realizations and EBITDA/t QoQ.
The company is looking at a demand revival in Thailand as the
government is expected to pump in money for the reconstruction post
the flood-related destruction last year.
Overall, the results are better than we had expected. The company has
managed to maintain the profitability of its Indian operations while even
its European operations have reported credible performance.
While the European operations would likely remain under pressure in the
near term, we expect things to improve gradually with: 1) cost benefits of
the Port Talbot BF rebuild and 2) a fall in raw material costs to help
maintain contribution margins.
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