Tata Steel Profit Misses Estimates on Benga Writedown, Taxes

Aug 13, 2014 9:39 am ET

(Adds comment from company executive in 10th paragraph.)

Aug. 13 (Bloomberg) -- Tata Steel Ltd., India’s biggest producer of the alloy, posted a worse-than-expected 70 percent drop in quarterly profit after a non-cash write-down on its Benga coking coal project in Mozambique and higher taxes.

Group net income, including that of unit Tata Steel Europe Ltd., fell to 3.37 billion rupees ($55 million) in the three months ended June 30 from 11.4 billion rupees a year ago, the Mumbai-based company said today in a filing. That compared with the 9.4 billion-rupee median estimate of 24 analysts compiled by Bloomberg. Sales rose 11 percent to 361.4 billion rupees.

The group posted a one-time loss of 2.62 billion rupees in the quarter, compared with a gain of 177.6 million rupees a year earlier. Tata Steel took a one-time impairment charge of 15.77 billion rupees on its 35 percent stake in the Benga mine in Mozambique. That occurred following a July 30 decision by the Rio Tinto Group, which majority-owned the asset, to sell its entire stake.

Tax expenditure more than tripled to 10.8 billion rupees. The company had reported a one-time deferred tax gain of 4.15 billion rupees in the year-earlier period.

The fall in profit was partially offset by a drop in raw material prices and earnings from the sale of a stake in a port venture.

Tata Steel in May sold its stake in Dhamra Port Company Ltd., an equal venture between Tata and a unit of India’s Larsen & Toubro Ltd., to billionaire Gautam Adani for an enterprise value of 55 billion rupees.

Production

In Europe, the company took steps to restructure operations and cut costs by producing more high-value products and reducing jobs.

Tata Steel shares, which have risen 26 percent this year, fell 1.4 percent to 534.50 rupees in Mumbai today. The benchmark S&P BSE Sensex rose 0.2 percent. The earnings were released about one minute before the close of trading.

Higher production in India helped Tata Steel increase sales volumes, while a drop in prices of iron ore and coking coal boosted profitability. Demand in Europe may expand as much as 4 percent from 2 percent to 3 percent, according to an Aug. 1 forecast by ArcelorMittal, the world’s largest producer of the alloy.

“European steel demand is moving in the right direction,” Karl-Ulrich Koehler, chief executive officer of the Tata Steel Europe, said in the statement. “Though demand remains well below levels we would regard as healthy, we can see greater stability emerging in the markets we serve.”

Expenses

The company sold 3.2 million tons of the alloy in the most recent quarter in Europe, or about 2 percent more compared with a year earlier. Group shipments rose 6.2 percent to 6.5 million tons.

Group earnings before interest, tax, depreciation and amortization, a measure of operational profitability, rose 11 percent to 364.3 billion rupees.

Total expenses rose 11 percent to 337.05 billion rupees in the quarter, while raw material expenses increased 5 percent to 110 billion rupees, the company said.

Net debt at the steelmaker, part of India’s biggest business group, was 677.3 billion rupees as of June 30, the company said in a statement. The company had 188 billion rupees of cash as of that date, it said.

Coking Coal

The quarterly contract prices of coking coal, one of the key steelmaking ingredient, dropped 30 percent to $120 a ton, while iron ore delivered at China’s Tianjin port averaged 18 percent lower at $103 a ton last quarter compared with year ago. Tata Steel Europe is almost completely dependent on outside sources for the steelmaking raw materials, while its Indian unit buys more than 50 percent of its coking coal needs from suppliers.

Last month, the company hired banks to raise the equivalent of $5.6 billion, the most since the acquisition of Corus Group Plc in 2007, to refinance debt taken to fund the purchase of European steelmaker. It raised $1.5 billion in two bond sales, according to the statement

Tata Steel, which has been shuttering sites and cutting jobs in the U.K. since the global financial crisis, will cut about 400 jobs at its South Wales steel plant, it had said in a statement on July 1. In Europe, the focus will continue to be on lowering costs and improving operational reliability, according to the statement.