>Tata Steel Ltd. (EMKAY)

TATA STEEL LIMITED
RESULT UPDATE

Strong performance, bleak outlook

Key highlights

* The average realization for Corus was around USD1,250/t as against our estimates if USD820/t. The realizations were better than fetched by ArcelorMittal from its European operations, which were to the tune of USD950/t. However, the management has guided that the average realization for 4QFY09 will be lower than 3QFY09 as the major reduction in realization was there in the month of Dec ’08, the full effect of which will be visible in 4QFY09.

* The company is taking various measures to reduce cost of production. The average cost of production for Corus was USD1,168/t as against our estimates of USD1,000/t. The management expects to receive operational cash savings of GBP600mn in 2HFY09 through various cost saving measures for Corus. The company also expects to receive synergy benefits in India and UK operations to the tune of USD226mn. In first 9MFY09, Tata Steel has realized synergy benefits of USD186mn.

* The outlook on Indian operations is optimistic, with the management guidance of 4QFY09 volume of around 1.5mt as compared to 1.1mt in 3QFY09. Till Feb ’09, it has done volumes of 1.1mt

* The outlook on Corus seems to be under some pressure with the auto and construction sectors witnessing 40-50% drop in demand. Around 2/3rd of Corus revenue comes from construction, automotive and domestic appliances and distribution segments.

* 30% of the deliveries of Corus are to the automotive sector, which are on contract. These contracts are due for renegotiation and the management expects that there might be some pricing pressure.

* The company has stopped purchasing additional coking coal and iron ore since Oct ’08 and has sufficient inventory to sustain the planned production. However, these inventories have been purchased at higher cost and due to subsequent fall in prices there has been inventory write downs to the tune of Rs17.4bn.

* Around 60% of Corus raw material contracts are due for renegotiation in Jan ’09 and balance 40% in Apr ’09. These contracts are expected to be signed at 40-50% lower rates as compared to FY09 as the current spot prices of iron ore and coking coal are ruling at 30-40% lower than contract rates.

* The 2.9mtpa expansion program at Jamshedpur is progressing as per schedule and the plant is expected to be operational by Dec ‘10.

To see full report: Tata Steel