Despite posting a good 216% growth in the consolidated net profit in the second quarter by Tata Steel, experts believe that the impact of steep correction in the steel prices and production cuts of 30% announced by Corus due to sluggish demand would reflect in the second half of FY2009 performance.
Pawan Burde, an analyst with Angel Broking said, ?European steel prices have fallen below $900 per tonne from $1,250 per tonne earlier. Corus, being a non-integrated player, has higher cost of production which raises concerns about the company in the coming two quarters.?
Tata Steel shares on Wednesday were up 10.80% on account of its strong Q2 figures to close at Rs 164.70 on the Bombay Stock Exchange. Corus contributes about 75% to Tata Steel?s total revenues.
JP Morgan?s European analyst Jeffrey Largey expects demand and price outlook to remain challenging for the next two to three quarters. ?Given the outlook for weak steel prices in Europe and higher cost of steel inventory, with Corus focus on de-stocking its inventory, we expect Corus to post weak earnings over the next 2-3 quarters,? the report adds.
Meanwhile, in Europe, Tata Steel targets to save about 350 million pounds of which 250 million pounds will be at the business level and 100 milion pounds at the corporate level.
Philippe Varin, CEO, Corus announcing the company?s Q2 financial results said, ?Of the 250 million pounds at the business level, 150 million pounds will be in reducing employee cost and 100 million pounds in saving energy cost.?
The reduction in employee cost will also include cut in bonus of management and staff in the second half on this year, Varin added.
Experts believe, these cost saving measures would mitigate the beating to some extent but the falling steel prices due to pressure on demand could impact significantly on the company?s margins.
?There is a further possibility of price cut as China has removed its export tax and there will be more dumping of the commodity in other countries including Europe. This is likely to further bring down the prices impacting the profits of Corus,? said Tarang Bhanushali, an analyst with India Infoline.
Tata Steel Ltd had reported a growth of 216% in its consolidated net profit to Rs 4,703.64 crore for the second quarter ended September 30, 2008 against Rs 1,489.56 crore in the corresponding period last year. Net sales for the period stood at Rs 44,198.97 crore, up 36% as compared to Rs 32,441.61 crore last year.
Puzzled future
• Steep correction in prices & 30% production cuts to impact
• Corus has higher cost of production
•Tata Steel shares were up 10.80% on Wednesday
