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Why Tata Steel shares are up despite profit loss

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 Habil Khorakiwala, chairman of Wockhardt
Habil Khorakiwala, chairman of Wockhardt

Shares in Tata Steel traded higher Tuesday despite the steelmaker missing its quarterly profit estimates. Consolidated net profit in the June quarter fell to Rs 598 crore from Rs 5,350 crore last year. The company had included one-time gains of about Rs 4,000 crore during the same quarter last year, excluding which profit declined about 55 per cent.

The stock traded 1.6 per cent higher at Rs 401.80 on the NSE at 11.30 a.m., outperforming the broader BSE metal index, which was up 0.3 per cent.

Here are the reasons for the gains in the stock price:

1) Strong domestic performance: Volumes were flat in India at 1.59 million tonnes, but sales rose 13 per cent to Rs 8,820 crore on higher realisations.

2) Top line growth remains steady: Consolidated net sales rose 2 per cent to Rs 33,550 crore, helped by gains in Asia.

3) Europe has hurt all: Steelmakers are struggling globally because of the debt crisis in Europe, weak growth in Japan and a slower pace of expansion in China, the world's largest producer and consumer.
Tata Steel was hit by weakening demand and prices in its European operations, which account for two thirds of the company's capacity. The company's steel deliveries in Europe fell 9.5 per cent.

Even ArcelorMittal, the No.1 steelmaker, had said last month that its European steel demand may fall 3-5 per cent this year.

4) Margins up sequentially: Consolidated operating margins rose quarter-on-quarter to 10.1 per cent in the June quarter from 9.3 per cent in the March quarter.

Brokerage firm Kotak said Tata Steel's consolidated EBITDA of Rs 3,400 crore was 10 per cent ahead of its estimates.

"The stock may not perform in the near term due to the economic slowdown and fears of steel dumping from China but valuations are attractive," it said in a note in the morning.


5) Brokerages remain positive: Global brokerage CLSA has a buy rating on the stock with a target of Rs 510. Margins improved in India as well as Corus. India expansion commissioning is the next trigger, CLSA said.

Domestic brokerage firm IIFL also maintained its buy call on the stock with a target of Rs 470.

IIFL expects Tata Steel to report strong earnings over the next two years due to a) impact of new 2.9mtpa capacity b) impact of restructuring exercise in Europe 3) benefits from overseas raw material projects.



(With inputs from Thomson Reuters)