Date: 2013-08-01

Tata Steel's Indian operations now pose a bigger concern

Tata Steel's dismal performance in the June quarter is a reflection of the health of the broader global steel industry, marked by weak demand and the inability of producers to raise prices significantly. And it is not only Tata Steel's European operations which are a worry.

The bigger concern is the fall in profit and operating margins at its Indian operations. On a consolidated basis, the company reported an 89% drop in profit to Rs 597.88 crore, because of the base effect. This comes as no surprise.

The only positive from Tata Steel's numbers is the slight improvement in its consolidated operating profit margin , sequentially. From a low of 5.2% during the December 2011 quarter, the company has gradually increased it to 10% at present.

But whether this margin is sustainable remains to be seen, considering that the troubles for the steel industry, both globally and in India, are far from over.

Tata Steel's consolidated sales grew a mere 2%, in line with what was seen in the previous quarter mainly due to sluggish demand for steel in Europe, from where the company earns 3/5ths of its revenue.

While the outlook for the steel industry in Europe remains bleak, Tata Steel's decision to temporarily shut down certain units would help the company reduce operating costs. Its total expenses on a consolidated basis were Rs 30418.47 crore during the June quarter, marginally lower than the March 2012 quarter.

On a standalone basis, the company reported a 13% year-on-year rise in total revenue to Rs 8908.03 crore. Its profit, however, was 39% lower at Rs 1356.56 crore mainly on account of raw material expenses which have risen as a result of the fall in the value of the rupee.

Tata Steel's operating profit margin on a standalone basis has declined sequentially compared with the year-ago period. Though investors had factored Tata Steel's exposure to Europe into its valuations for sometime now, there was optimism regarding its Indian operations. Now concerns revolve around its Indian operations as well.

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