Tata Steel - Earnings marred by forex losses and initial start-up costs - Prabhudas Lilladher

Tata Steel reported Q2FY13 earnings below our expectation on account of higher than expected costs in domestic operations and weakness in European operations. We believe that current earnings in domestic operations don't reflect the normalised earnings given the high cost in expanded capacity due to instabilisation of facilities, elevated forex losses and absence of scale benefits. We maintain our 'Accumulate' rating, underpinned by strong domestic operations and comfort on valuations.

- High forex losses and lower by-product sales marred domestic earnings: Earnings for the quarter were impacted by forex loss of Rs1.8bn (shown in other expenses) on MTM of forward covers on loans and absence of by-product sales (against Rs1.86bn QoQ). Hence, EBITDA fall short of our expectation at Rs24.0bn (PLe: Rs28.6bn), down 10% YoY (9% QoQ). Steel realisations dropped 3.7% QoQ/Rs1521 to Rs39121, marginally better than expectation of Rs39036. Thanks to higher than expected other income and lower tax rate, fall in PAT was restricted to 1% QoQ (10% YoY) at Rs13.4bn (PLe: Rs15bn).

- Tata Steel Europe (TSE) report loss on EBITDA: TSE's sales volumes declined 2% YoY (+6.5% QoQ) to 3.42m (PLe: 3.15m) tonnes. Realisations declined US$80/t QoQ to US$1124, below our expectation of US$1138. Higher-than-expected fall in realisations led TSE to post loss of US$7.6m (-US$2/t) against our expectation of positive US$32m (US$10/t). Company posted an EBITDA of US$63m and US$111m in Q2FY12 and Q1FY13.

- Key highlights of earnings con-call: 1) Q3 earnings outlook muted for domestic operations due to softening in contract prices 2) Maintained guidance of 1m tonne incremental volumes in domestic operations; majority to come in Q4 3) Triennial valuation in European pension schemes completed with net deficit of GBP500m to be recovered over 15 years 4) Management expects minimal cash outflows in these schemes during initial years.

Source : Equity Bulls

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