Tata Steel Q1: Analysts expect PAT to fall 88% at Rs 655 cr

Tata Steel, one of the world's top ten steel producers, is set to announce its results for the quarter ended June 2012 on Monday. Analysts on an average expect the profit after tax to fall by 87.6% year-on-year to Rs 655 crore, but quarter-on-quarter the same is expected to jump 51.1%.

Profit after tax in the quarter ended June 2011 had included an exceptional gain of Rs 3,900 crore due to stake sale in Riversdale for Rs 2,880 crore, sale of shares of Tata Refractories for Rs 440 crore and receipt of Rs 590 crore from TCP arbitration settlement. After excluding these gains, PAT is likely to decline 52.88% YoY.

Net sales are expected to be flat YoY at Rs 32,700 crore as against Rs 32,839.9 crore due to lower volumes and prices from its European operations, but QoQ the same is likely to decline 3.4%.

Earnings before interest, tax, depreciation and amortisation (EBITDA) are seen going down by 23.4% to Rs 3,265.67 crore, but QoQ that is likely to increase 7.4%.

EBITDA margin is expected to be at 10% in the first quarter of financial year 2012-13 as against 13% in a year ago period and 9% in the previous quarter.

Expectations:

Analysts expect the consolidated net profit to decline despite a YoY growth in standalone net profit as the profitability at Corus will remain under pressure.

Results will have an overhang due to exposure to the weak European steel market through Corus and high debt levels.

Net debt at the end of previous financial year 2011-12 rose USD 9.38 billion (Rs 47,697 crore) from USD 9.17 billion in FY11, which included payment amounting to USD 0.7 billion towards the gross debt.

Analysts feel the overseas operations mainly in Europe will show some improvement on QoQ basis due to slightly higher realizations and lower coking coal cost.

Despite restructuring efforts at TSE and increased capacity at TSI, operating margins will remain under pressure due to challenging steel business environment.

Tata Steel India (TSI):

Sales volume will remain flat YoY despite commissioning of new blast furnace as weaker demand and shutdown of two old furnaces have constrained volumes during the quarter.

TSI volumes are likely to be at 1.6 mt, which is flat YoY and a drop of 9% QoQ in domestic volume for Q1FY13 due to lower seasonal demand.

Topline will increase 5-6% YoY largely due to increase in realization, but that is expected to be flat QoQ.

Analysts expect EBITDA per tonne to increase 3% on QoQ to USD 340 per tonne due to the following:
*Long and product prices have increased YoY though they have started tailing off towards the end of Q1;
*Lower coking coal prices and normalization of employee cost will lead the EBITDA per tonne to grow QoQ (TSI imports 50% of their domestic requirement);
*Staff costs will be lower by 4% QoQ

TSE (Tata Steel Europe) and others are combating the tough global environment:

Steel prices have seen significant decline recently, but the impact of lower prices will be seen only in second quarter of FY13.

European operations are expected to witness a marginal improvement in respect of sequential performance on the back of lower raw material costs.

Sales volumes: Corus volumes are expected to be down by 7%QoQ at 3.3mt.

Topline will be impacted as realisations will be down 15% YoY (up 2% QoQ).

EBITDA per tonne margin will be supported by higher realisations and flat costs at European operations, but analysts expect EBITDA per tonne in Europe operations to be doubled QoQ to USD 17 (it was USD 8 per tonne in 4QFY12 and USD 78/tn in 1QFY12).

Significant improvement was seen in the previous quarter due to lower raw material costs and price hikes.

South Asian operations are expected to report a slightly subdued performance with a 21% YoY and 30% QoQ drop in EBITDA per tonne at USD 20.

Tata Steel (India) commissioned its 2.9 mtpa brownfield expansion in Jamshedpur in the first quarter. It will increase capacity to 9.7 mt and will boost performance in 2012-13.

Going ahead analysts expect gradual production ramp up at the 3 mtpa brown-field expansion with 1 mtpa of incremental sales in FY13.