Tata Steel: Hold

Recommendation: Hold

Krishnan Thiagarajan

IN A difficult year for the steel industry, the Tata Iron and Steel Company (Tata Steel) has posted a decent financial performance for 2000-01.

It recorded a 13 per cent rise in turnover to Rs 7,759.44 crore and a 31 per cent growth in post-tax earnings to Rs 553.44 crore in 2000-01 over the previous year. However, most encouraging was the sharp 78 per cent growth in `profits before extraordinary items and tax' Rs 888.28 crore from Rs 499.10 crore.

This strong financial performance can be attributed more to the richer product-mix and tight control over costs than to higher volumes and improved realisations. This year, the production and sales volumes rose 5 per cent and 6 per cent at 3.41 million tonnes and 3.40 million tonnes respectively. Realisations improved by only 6 per cent. In contrast, the tighter control over costs, especially the decline in staff costs following the phased employee separation programme, and a richer product-mix helped Tata Steel register strong growth in operating profit margins -- at 21.93 per cent it was 4.03 percentage points higher over the previous year.

Similarly, following a tight control over interest costs (a mere 5 per cent rise over the previous year), the gross profit margins improved 4.36 percentage points to 17.79 per cent. It is likely that the interest cost will be kept in a tight rein as all major expansion and modernisation programmes of Tata Steel have been completed. Under Phase V of its modernisation programme, the company plans to use its free cash flows to retire debt, reduce interest costs and create further scope for improvement in its gross profit margins.

However, this strong performance at the gross profit level continues to be marred by the rising employee separation compensation costs. Although the employee separation cost is a strategic cash outflow aimed at protecting the long-term competitiveness of the company, it is nevertheless depressing the overall post-tax earnings. For 2000-01, Tata Steel recorded Rs 201.52 crore as an extraordinary item towards employee separation compensation against Rs 157.99 crore the previous year. It also made a one-time provision for power cost relating to the previous years of Rs 86.20 crore.

More than the past, it is the future that holds the key to Tata Steel's growth. Since the commencement of commercial production of the 1.2 million-tonne cold rolling (CR) mill in August 2000 and a galvanising line in early 2000, more than half the hot rolled (HR) output is being used for captive consumption in CR Coils, CR sheets and GP/GC (galvanising plain/galvanised corrugated) sheets. For 2000-01, the company sold 3.38 lakh tonnes of CR coils/sheets. And this sales volume is likely to rise sharply this year, on the back of a marked rise in capacity utilisation levels.

As the price realisations for CR and GP/GC products are higher than HR by 25-35 per cent, the movement up the product value chain is likely to lead to an improvement in Tata Steel's performance, both at the operating and net profit level. In addition, the demand for value-added CR/GP/GC products is significantly higher and less volatile than for longs and the overall steel demand. This transformation in the product-mix is slated to enhance the attractiveness and competitive strength of Tata Steel in the domestic market vis-a-vis its industry peers.

However, the international price trends, the threat from cheap imports and the pick-up in demand for HR/CR and GP/GC from the automobile/engineering segments continue to remain uncertain variables for the steel industry, in general, and Tata Steel, in particular. In this backdrop, shareholders can stay invested at the current price levels, but fresh investments may be contemplated after evaluating the first quarter earnings performance.

Pic.: Cold rolling unit at the Tata Steel, Jamshedpur... The Company's strong financial performance is due to recent change in product mix.