TATA SPONGE posted very good results

Tata Sponge has posted very good results for the three months period ended 30^th June 2008. At a glance, the QoQ performance would seem discouraging compared to the YoY, which has been much more encouraging. But it is only on reading the fine print that one can conclude that the company has had a good quarter.

QoQ, the company’s net sales fell 25% at Rs.101.77 crore and this led to a cascading fall in the profits. EBIDTA was down less than one percent at Rs.51.05 crore. PBT was down 1.29% at Rs.44.47 crore. PAT was down 12.29% at Rs.29.33 crore. But yet, we maintain that the company has done well? There are three pointers to this fact.

Firstly, though the company’s sales have dropped, its realisations have gone up substantially and this has been reflected in higher profit margins. OPM, on a QoQ was up 50.16% compared to 37.78%. NPM is up at 28.82% as against 24.50% in Q4FY08. Infact QI of the current fiscal has seen the highest profit margins in its entire history!

Secondly, the past trend indicates that the first half of the fiscal, comprising of Q1 and Q2 is usually low, that has been the cyclical trend, It is only the second half which seems some great jump in sales. So the fall in sales is due to the cyclical nature of the business, which is beyond the control of even the company.

And thirdly, YoY, the financial performance for the Q1 ended 30/06/08 has been excellent. Net sales is up by a whopping 88% and net profit is up 77%.

We had recommended this stock as an excellent buy for long term and even today at Rs.227, we feel that this is a good buy. The downward risk is minimal.
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