>TATA STEEL LIMITED (ICICI SECURITIES)

Tata Steel registered lower-than-expected Q2FY10 results with PAT declining 58% YoY to Rs9.02bn. Topline dipped 17% YoY and was 7% below I-Sec estimates. This was owing to 3% QoQ degrowth in realisations, a seasonal phenomenon owing to: i) monsoons impacting demand and ii) holidays capping consumption in the North and East. Also, sales of ferro alloy fell 53% YoY. However, impressive cost performance led to sequential margin improvement (300bps). Higher fund mobilisation of ~Rs27bn in H1FY10 (net of ~Rs24bn repayment) led to increased interest outgo (15% QoQ). Maintain BUY

■ Impressive cost performance. Increased usage of low-priced coking coal, and reduction in power & fuel and freight costs led to 3% QoQ fall in overall costs (with flat production). Higher other expenses (up 9% QoQ) imply higher dependence on third-party rerollers and conversion agents.

■ Start of price war in the South does not augur well for industry. While flat products division has been able to service the robust auto market demand and is holding inventories commensurate to service level agreements, the long products division is facing structural short-term margin pressure. Our channel checks suggest that JSW Steel (aggressively marketing from SISCOL) has managed to snatch market share from RINL (with current inventory of 0.4mnte), which now offers high carbon wire rods at MS wire rod prices. Also, premium of Tata Steel to JSWS (in wire rods) has reduced to Rs500/te for some customers in the South and business has started getting relocated to the eastern markets (such as Ranchi).

■ Also, volume pressure led to October ’09 being hit harder than October ’08. While the price war has resurfaced, demand has been lacklustre on both B2B and B2C fronts. Floods in Andhra Pradesh and Karnataka in October led to a sharp drop in offtake. As consumer sales dip, the project segment (ex wire rods) too has come under pressure owing to lack of interest from real-estate majors. While the segment targets run rate of 75,000tpm, only 50% has been achieved for October deliveries (as on date). We continue to see high levels of dealers/end-users’ stock in eastern & western markets (Tata Steel’s long product inventory stands at 0.13-0.14mnte).

■ Way forward. Wire rods (17% of long product sales) are the main contributor to margins of Tata Steel’s long products division. Continuous undercutting by JSWS in the South will pressurize margins of the wire-rod segment (except WR3, which is 6ktpm). Also, with a 4-mnte market and dominance of ISPs, probability of a price war and margin erosion is high. Prices will drop even further once JSWS’ 0.6-mtpa wire rod mill is fully operational. Also, JSPL has started trial rolling of 2-3 grades of wire rods from Nalwa plant. While Tata Steel is capacity-constrained, contribution-based product mix will require expanding coverage to cater to demand from all segments; there is need for focus on strutcurals (absent at present) and TMT production.

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