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BL Research Bureau

Tata Steel has delivered stronger-than-expected profit growth in its consolidated operations for the September quarter of 2008-09.

The consolidated results reveal a 36 per cent growth in consolidated sales, as against a 45 per cent growth managed by standalone operations (numbers include its key Corus operations). Operating profits for the consolidated entity expanded by 79 per cent, with operating profit margins rising by over 5 percentage points to 16 per cent for the quarter.

These results were much stronger than managed by Tata Steel on a standalone basis — which saw a lower 47 per cent increase in operating profits. As a result of the strong margin growth, net profits for the consolidated operations grew nearly twofold, compared to the 50 per cent profit growth for the standalone entity.

Tata Steel’s geographically diversified operations probably enabled to take better advantage of strengthening global steel prices over the quarters to September than its peers with purely India-centric operations, which saw policy pressures on prices. Long-term contracts also appear to have helped Corus protect its margins.

Tata Steel has been the only domestic steel player that could deliver expansion of operating margins for the last three quarters. Full backward integration for iron ore and 70 per cent captive sources for coking coal in the India operations aided margin expansion.

While the operating performance thus far has been impressive, Tata Steel’s earnings remain at risk from the sharp downward pressure on steel prices on global recessionary trends, which have corrected by about 50 per cent since their peak in July 2008.

Corus’ realisations are protected over the next couple of quarters by long-term sale contracts locked in at higher prices, but thereafter they may be exposed to a correction.

The company has made clear its intention of negotiating lower prices for inputs such as iron ore and coking coal. With these inputs already correcting sharply, lower costs may hold the key to whether Tata Steel’s European operations manage to hold margins.

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