Impairment charge on assets pulls Tata Steel Q1 net down by 70%

Written by fe Bureau | Mumbai | Updated: Aug 14 2014, 06:50am hrs
Tata Steel posted an unexpected 70% year-on-year decline in consolidated net profit for the June quarter at R337 crore. The hit came from an exceptional charge of R1,577 crore on account of impairment of assets and goodwill at its Benga coal project in Mozambique, a joint venture with Rio Tinto.

Tata Steel has a 35% stake in the Benga project and Rio Tinto has decided to sell its coal business in Mozambique to Indian state-owned coal mining consortium International Coal Ventures. The charge on account of impairment of assets was mitigated to some extent by a profit of R1,314 crore from the sale of non-current investments. The net exceptional charge on consolidated income statement stood at R262.5 crore.

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The year-on-year decline in Tata Steels consolidated net profit also looks severe since the company benefited from a one-off tax write-back of R415 crore in the June 2013 quarter.

A Bloomberg poll of Tata Steels earnings estimates for the first quarter pegged net profit at R1,048 crore and turnover at R35,643 crore.

Tata Steels turnover for the April-June period came in at R36,427 crore, up 11% over the year earlier.

Barring the exceptional impairment charge, Tata Steel did well during the June quarter with its consolidated operating profit rising 15% year-on-year to R4,325 crore.

The company also managed to sell more steel during the period with deliveries of 6.46 million tonnes, versus 6.08 million tonnes during the June 2013 quarter. Tata Steels consolidated Ebitda (earnings before interest, tax, depreciation and amortisation) per tonne of steel sold came in at R669.50 for the June quarter, up 8% over a year earlier.

Tata Steels numbers were broadly in line with what was expected, though the performance of the European business came as a positive surprise, said Giriraj Daga, senior research analyst at Nirmal Bang Equities. The one-off impairment charge that has affected net profit is not much of a concern since the operating profit has shown healthy growth.

On a sequential basis, however, Tata Steels operational performance remained depressed. Steel deliveries fell from the 7.62 million tonnes recorded in the January-March quarter. Consolidated turnover fell 14% quarter-on-quarter, and net profit declined sharply from the R1,036 crore achieved in the preceding three months.

Daga said the last quarter of any fiscal is typically the best quarter for steel companies since they actively push sales to clear inventories during the January-March period, which explains the sequential decline in revenues and profitability in the first quarter of FY15.

Tata Steels India operations showed year-on-year improvement with turnover rising 11% over the year earlier to R10,468 crore, and net profit rising 67% to R2,268 crore. This, according to a company statement, was driven by better realisations and higher volumes of products like automotive steel and branded products.

The substantial rise in the bottom line was aided by the profit of R788 crore made on the sale of Tata Steels stake in the Dhamra Port project during the quarter. Governments thrust on development of core industries like housing and infrastructure should boost steel demand in the coming quarters, TV Narendran, managing director of Tata Steel India and South Asia said in the statement. We continue to grow our delivery volumes with enrichment of the overall product mix.

Tata Steels European operations, which had been struggling for a while due to the economic slowdown in the euro zone, further consolidated the operational turnaround that began a few quarters earlier. Earnings before interest and tax from the European business grew more than tenfold over the year earlier to Rs 136 crore in the June quarter.

Turnover from the European business grew 12.5% year-on-year to R20,471 crore.

European steelmakers have been contending this year with rising imports, which are limiting their ability to take advantage of growing European demand, Tata Steels statement said.

The Tata Steel shares closed at R534.70 on the BSE on Wednesday, down 1.33%. The bourses benchmark Sensex gained 0.15%.