Tata Steel likely to gain in strength: Buy
The Tata Steel stock has declined almost 16 per cent since January, mainly due to the deterioration in the high-margin Indian operations in the recent December quarter.
The Indian business is, however, expected to show improvement in the coming quarters. Investors can, therefore, buy the Tata Steel stock. At ₹343, the stock trades at a reasonable 0.7 times the company’s estimated book value per share for 2015-16, below the five-year average valuation of 1.2 times.
Tata Steel, which operates in India, Europe and South-East Asia, derives close to 30 per cent of its revenues from India. For the nine months ended December 2014, the standalone (India business) net profit was ₹5,625 crore as against a consolidated profit of ₹1,749 crore.
Unlike most other steel manufacturers, Tata Steel meets its entire iron ore requirement in India from its captive mines, which gives it a cost advantage. However, with mine closures affecting supplies, the company’s operational performance took a hit in the December quarter.
Following a Supreme Court order, the mines were shut down last year after they were found to be operating under deemed extension (after the end of their first renewal period of 20 years).
Hurt by higher raw material costs, operating profit per tonne of steel (EBIDTA/tonne) in India declined 39 per cent to ₹9,294 in the December quarter compared to the year-ago period.
Most of these mines have resumed operations since December ‘14-January ‘15.
This should provide relief on the raw-material cost front.
Tata Steel also stands to gain from an expansion of its value-added products portfolio. It is expected to commission the first 3 million tonnes per annum (mtpa) phase of the 6 mtpa Kalinganagar plant in Odisha by mid-2015. The upcoming plant will cater to the demand for high-value flat steel products from sectors such as automobiles, thereby boosting sales volumes and realisations.
While the overall domestic demand for steel remains weak, Tata Steel has managed to grow volumes, particularly of value-added steel products in the December 2014 quarter.
Impacted by lower realisations and higher costs at the Indian operations, Tata Steel’s operating profit (EBIDTA) fell 23 per cent at the consolidated level in the December quarter. Net profit too contracted almost 70 per cent to ₹157 crore. Debt-to-equity ratio (consolidated) stood at 1.4 times as on September 2014.
Going forward, improvement in the availability of domestic raw materials and the weakness in global commodity prices should support profitability. Domestic demand should also improve as the economy gains traction.
Fitch affirms ratings on Tata Steel on improving financial position
Fitch Ratings affirmed the Long-Term Foreign Currency Issuer Default Rating (IDR) on Tata Steel at ‘BB+’ on improving financial position, helped by expanding and highly profitable Indian operations stable European performance.
The company’s net leverage improved to 4.6x at end-FY14 from 4.9x at end-FY13, according to Fitch Ratings. It expects net leverage to further decrease to below 4x by FY16.
Fitch Ratings said commissioning for new 3 million tonne plant at Kalinganagar mid-2015 resumption of halted iron ore operations will help profitability.
“The suspension hurt Tata Steel’s profitability during the third quarter… However with most of the company’s mines resuming operations in January 2015, Fitch expects profitability to increase and support the improvement in its financial profile,” Fitch Ratings wrote.
Earnings before interest, taxation, depreciation and amortization fell to Rs. 9,294 per tonne compared with over Rs. 15,000 during first half of 2015.
Fitch Ratings said European operation has remained firm with stable volumes of 9.86 million tonnes during first nine months.
“Fitch expects the European operation to maintain its performance during FY16, driven by its expectations of modest improvement in market conditions for western European steel producers, the company’s on-going cost cutting measures and improving product mix,” it said.
Chinese power equipment faces potential ban in India
THE Indian Electronics and Electricals Manufacturers’ Association (IEEMA) has alleged that power transmission infrastructure in 18 major Indian cities is vulnerable to a potential hack, resulting in national security threats and a major disruption of power.
In a reported letter to the National Security Advisor Mr Ajit Doval, the representative body of power equipment makers has asked for a complete ban on Chinese equipment in the Indian power sector citing security concerns.
“Awarding projects related to power generation, transmission and distribution network to Chinese companies will be a serious threat to national security as the electric distribution system carries power to pipelines, water systems, telecommunications and other critical infrastructure, while also serving critical government or military facilities,” the IEEMA letter stated.
Steel imports surge 71 pc in FY15
STEEL imports have surged by 71 per cent to touch a record high of 9.31 million tonnes (mt) during FY15, adding to the mounting pressure on domestic companies’ margins which are already squeezed.
While steelmakers in India, who remained net importers for the year, have been facing problems for some time, primarily due to higher prices of raw materials, their counterparts in China, Japan and Russia were able to take advantage of lower iron ore prices, and in some cases, sops offered by their respective governments.
India imported 7.38 mt of steel in FY10, 6.66 mt in FY11, 6.86 mt in FY12, 7.93 mt in FY13 and 5.45 mt in FY14.
Exports, however, have been declining, especially in recent years. Outbound shipments of steel stood at 3.25 mt in FY10 and grew to 5.98 mt in FY14, only to drop by 8 per cent to 5.5 mt in the last fiscal. “Due to rising imports fromcountries like China, Japan and Russia, the domestic steel industry is struggling to retain margins. Cost structure in these countries has been significantly lowered on account of a fall in iron ore prices, and depreciation of their currencies against the dollar. So, in dollar terms, their cost of production has come down,” said an analyst.
BHEL to set up Telangana power plant
DOMESTIC power equipment maker Bharat Heavy Electricals Ltd (BHEL) has been appointed by Telangana State Power Generation Corporation Ltd (TSGENCO) to set up four 270 MW units at a cost of Rs 5,000 crore in the state.
The units would be established at Manuguru in Khammam district of Telangana.
“The project is targeted to be commissioned in 24 months on fast-track basis with both TSGENCO and BHEL setting up teams to expedite clearances and execution of the project,” BHEL said in a statement.
This post was written by Atlantic Admin