The company was able to control its raw material cost like coking coal and conversion cost saving to the extent of Rs 550 crore along with reduction in fixed cost such as interest cost by 4.3% to Rs 1327 crore as a result of refinancing of its debt.
One advantage of a ready capacity and operation that Tata Steel has at the time when the industry is recovering is that it is now enjoying the benefits of operating leverage. During the December quarter, company posted 59% increase in EBIDTA on a mere 15% growth on overall consolidated revenues. Obviously there was 8% gain on account of volumes and similar increase in realisations, what really helped the profitability was drop in total expenses to 90% of sales as against about 97% of sales in the corresponding quarter last year.
The company was able to control its raw material cost like coking coal and conversion cost saving to the extent of Rs 550 crore along with reduction in fixed cost such as interest cost by 4.3% to Rs 1327 crore as a result of refinancing of its debt. The company had earlier guided that refinancing could led to savings of close to 40 basis points in interest cost which translates to annual saving of $5 million.
Once again India operation, which is about 50% of its business, stole the show making strong 10% volume growth to 3.27 million tonne as against mere 4% volume growth made by European operation. Importantly, as mentioned above, because of the cost saving, India operation made significant improvement in EBITDA by close to 25% on a yoy basis to Rs 14094 per tonne.
As against this, European operations reported mild growth, part of which is on account of planned outages impacting volumes. Despite 21% yoy growth in revenue, on account of better steel realisations, Europe made little contribution to overall performance largely on account of higher cost. During the December quarter Europe’s EBITDA dropped to Rs 2589 per tonne as against Rs 3027 per tonne in the corresponding quarter last year.
ValuationsDomestic operation will continue to drive growth. In FY19, we are expecting domestic volume of about 12.3-12.4 million tonne as against 11 million tonne in financial year 2017. The company is hopeful of better domestic demand post GST.
Post December, which is generally a holiday period, European demand should also improve. Moreover recently steel realisations have seen an uptick of about Rs 2000-3000 per tonne, which should reflect in overall performance in Q4FY18 and afterwards.
Reflecting these changes there is room for minor earnings upgrade. Street is expecting net profit of close to Rs 5200 crore in FY18 and Rs 7200 crore in FY19.However investors should have marginal return expectations as the stock at the current market price trades fully discount these positives. It is trading at 6.5 times enterprise value to operating profit. Street will also closely watch its rights issue and developments with respect to acquisition of troubled domestic steel assets.