TATA Steel's domestic business may drag global play - Report
For TATA Steel, its profitable domestic operations helped cushion much of the pain caused by its wholly owned European subsidiary. But not anymore, as India's oldest steelmaker is confronted by a sharp fall in profits in the June 2012 quarter at its Indian operations, which could worsen, if bearish trends prevail in the industry.
The Jamshedpur based steelmaker, which consistently gained from captive resources and a marquee product basket, compared to lackluster performance from its much larger international subsidiary, saw its bottom line fall 39% in the June 2012 quarter as jittery customers postponed purchases of automobiles and consumer durables.
What is worrying investors is the company's bet that returns from its forthcoming Greenfield project in Odisha would also contribute toward servicing the debt, which by the end of June 2012 totaled INR 54,000 crore.
A 38% rise in expenses and a surge in raw material prices it doesn't own, coupled with the overall sluggish demand, was all it took to drag down the fiscal first quarter profits at the over 100 year old company, largely credited to be the backbone for the sprawling TATA conglomerate.
But the lack of demand in India, considered to be the cornerstone for the industry worldwide, along with China, indicates that TATA Steel could likely take that much longer to climb back. TATA Steel did not respond to queries sent by ET.
But a person familiar with the development said that the company is confident its future projects would start generating returns soon. TATA Steel is building a 6 million tonne plant in Odisha in two phases and the first phase will be implemented by 2014. It already makes 6.8 million tonnes at Jamshedpur and has a combined capacity of 27 million tonnes globally. It is also expanding Jamshedpur plant to 9.7 million tonnes.
Unfazed by the downtrend, the steelmaker is committed to the expansion, for which Reuters reported the company is expected to mandate a project financing loan of up to INR 22,000 crore to fund its 6 million tonnes per annum Greenfield steel plant at Kalinganagar in Orissa.
India's oldest steelmaker is confronted by a sharp fall in profits in the June quarter at its Indian operations, which could worsen, if bearish trends prevail in the industry
Mr Rakesh Arora of Macquarie Securities said that "What the company is hoping is that returns from the Greenfield project will be high enough and will throw free cash flow to service its debt beyond the project debt. But, we think that given the sharp downward trend in iron ore and coking coal, the cash flow generation from these projects can be lower than expected and might put some strain on the company to meet its debt obligations."
Mr Anubhav Gupta of Kim Eng Securities, part of Malaysia's Maybank Investment Bank, said that "The first quarter volume was 1.6 million tonnes, which is lower compared to our estimate of 1.7 million tonnes. Also the steel EBITDA of USD 346 a tonne (lower by 6%), is due to lower sales and high raw material costs. Although, TATA Steel will start its new 3 million tonnes plant in December 2012, with slowing demand, the company's target of 20% rise in FY 2013 sales volume seems optimistic. Our forecast is 7.3 million tonnes."
Source - Economic Times