>TATA STEEL: Overseas business had an erosive impact on net worth

Despite free cash flows of INR22b, net debt increased 5% to INR524b Operating cash flows were up significantly due to working capital release in FY12 against large increase in FY11. Also, half of the INR120b capex was funded by asset sales. Despite free cash flows of INR22b, net debt increased 5% to INR524b.


Net worth driven by asset sales and translation gains, not by business profit
The net worth of the Tata Steel group increased by INR77b to INR433b largely due to equity infusion, asset sales, goodwill and asset translation gains. Core profit from India business after paying dividend contributed INR47b, but this was offset by INR42b of after tax loss in overseas operations. Actuarial loss of INR24b in overseas business had an erosive impact on net worth.


Adjusted EPS 11% lower than reported EPS
EPS adjusted for the distribution expense of INR2.25b towards hybrid perpetual securities (HPS) was INR18.6, 11% lower than reported EPS. From the common shareholder’s perspective, HPS is debt and the interest in the form of distribution expense should be adjusted against EPS.


Other highlights
 The management highlighted that Tata Steel Europe (TSE) is under enormous stress due to prolonged recession in Europe. Stricter environmental norms ahead will increase costs. The covenants on acquisition debt are also concerning.


 Full commissioning of the Jamshedpur Brownfield expansion is delayed by further three months. Poor 1QFY13 volumes and project delays have put the guidance of 1m tonnes of incremental volumes in FY13 at risk, in our view.


 Coking coal shipments have started from Mozambique in June 2012. Iron ore shipments from Canada are likely to start in 4QFY13. Outlook not very encouraging


 Significant cost increases on account of power, freight, iron ore, etc for India operations are sticky in nature. For TSI (Tata Steel India), the increase in revenue in FY12, driven by volumes and prices, was offset by increase in costs.


 TSE not only faces the challenge to deal with the steel price and raw material cost squeeze, but also rising specific fixed costs due to production loss.


To read report in detail: TATA STEEL