Tata Steel: European operations turn around
Vishal Chhabria/Mumbai - Feb 18,2010 00:31 AM
Led by a better-than-expected consolidated results for the December 2009 quarter, Tata Steel's stock jumped 6.37 per cent to close at Rs 584.90 on Wednesday. Although lower realisations and output resulted in net sales falling 21 per cent (to Rs 26,202 crore) and net profits by 42 per cent (to Rs 472.65) on a year-on-year basis, the market is happy about the improvement at its European operations. This in turn helped the company churn profits in the December quarter after three consecutive quarters of losses.
The biggest worry for Tata Steel Europe is easing now, as it reported a profit at the earnings before interest, tax, depreciation and amortisation (Ebitda) level. Ebitda of $37.4 per tonne was registered this quarter, partly aided by cost-reduction initiatives, as compared to a loss of $52 per tonne in the September quarter. Higher capacity utilisations of 81 per cent compared to 75 per cent in September quarter, along with better realisations, also came to the rescue of European operations (that accounts for 65 per cent of consolidated revenues). With the company planning to mothball its loss-making Teesside operations this month, its expects further improvement in Ebitda.
Here on, the performance will be driven by its European operations, as cost pressures are increasing due to higher cost of raw materials along with mild recovery in the steel demand in Europe.
Although, the company has completed the feasibility study for mining iron ore in Canada and is also likely to start coking coal production in Mozambique by end-2011, benefits will only be felt in the long run. Also, its high debt-equity of about 1.6 times (gross debt of $12.9 billion) will be among the key things to watch.
Considering the net loss of Rs 4,443 crore for nine months ending December 2009, analysts are not expecting a significant improvement in 2009-10. However, they estimate an EPS of Rs 80 for 2010-11 and Rs 120 in 2011-12, which values the stock at a PE of 7 and 5, respectively. Considering that analysts have put a price target of Rs 700-750 for Tata Steel, there seems to be room for upside.
Additional reporting with Sunaina Vasudev and Jitendra Kumar Gupta
LALIT KUMAR BHATNARIA
PGDM IIsem
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