Tata Steel slips; profits boosted by sale of investments in Tata Motors, Titan

The company reported 21.8% rise in its net profit at Rs. 1,528.7 crore for the quarter ended September 30, 2015 as compared to Rs. 1,254.3 crore for the quarter ended September 30, 2014.

Recovery in earnings would take longer than expected, says IIFL and downgrades stock to Reduce with a revised price target of Rs. 211

Tata Steel’s consolidated results were quite weaker than estimates due to an operating loss in its European division.  Tata Steel has slipped 4% at Rs. 216.75 on BSE. The company reported 21.8% rise in its net profit at  Rs. 1,528.7 crore for the quarter ended September 30, 2015 as compared to Rs. 1,254.3 crore for the quarter ended September 30, 2014.

Tata Steel’s consolidated results were quite weaker than estimates due to an operating loss in its European division.

Domestic operations reported strong volume growth, however, this impact on operating profit was offset by a rise in raw material costs.

Outperformance in bottomline was on account of profit from sale of quoted investments in Tata Motors and Titan.

In standalone results, raw material costs increased on a qoq basis due to purchase iron ore as the company’s Naomundi mines was shut during the quarter. Contribution from the FAMD division would increase from H2 FY16 as all mines are operational from second half of Q2 FY16, says a note by IIFL.

European operational performance was weak due to the sharp depreciation against the Dollar and pressure on prices from cheaper imports. The company reported a loss at adjusted EBIDTA/ton of US$7/ton against US$26/ton in Q1 FY16.  Operations in Europe are expected to remain weak due to pressure from cheaper imports and lower spreads in UK.

Performance of South East Asia operations improved on a qoq basis, but remained subdued due to dumping of material from China
Management expects H2 FY16 to be better for domestic operations as Naomundi mine has resumed operations, full benefits of FAMD division, volume push from Kalinganagar and lower raw material costs, the IIFL note added.

IIFL lowered estimates factoring in the sharp correction in steel prices. The brokerage has also lowered volume guidance in Europe as demand remains weak in the region and imports remain high.

Recovery in earnings would take longer than expected and downgrade the stock to Reduce with a revised price target of Rs. 211