The sixth largest steel company in the world, Tata Steel, declared its first ever consolidated financial performance for the first quarter ended 30th June 2008. The company took over Corus in April 2007 and the performance of this quarter shows how advantageous it is to have a company outside India. Tata Steel has been unable to raise the cost of its steel in India despite the mounting operating costs, at the behest of the Govt to tame inflation. But there was no such restriction on its Corus in Europe which it passed on to the consumers and this has helped boost the bottomlines of Tata Steel.
Yet, the other fallout of the takeover is that liabilities also come along with the assets. So what is to be noted here is that Corus has pension funds worth around Rs.1,20,000 crore and that has eroded by around Rs.53,520 crore. The company has accounted for this erosion in the balance sheet rather than the P&L account to avoid huge fluctuations in earnings on a quarter to quarter basis. This is a MTM loss and is thus subject to change. If the company had accounted for this erosion too, then the PBT would have been lower by Rs.5352 crore, meaning the company would have plunged into losses! But because it is a part of the Reserves and surplus, it has been able to show a whopping performance for current Q1.
The consolidated net revenue of the company for the first quarter ended 30/06/08 was at Rs.43,508.28 crore. It would make no sense to actually compare this performance with that of Q1FY08 as the full integration of Corus has happened only now and this has been reflected in the performance. On a standalone basis, for current Q1, the company’s net sales had stood at Rs.6,615.03 crore, meaning Rs.31,178.22 crore has come from Corus and the other subsidiaries of Tata Steel, which accounts for 72% of the net sales of Tata Steel. Now that is tremendous!
EBITDA on a consolidated basis was at Rs.7040.28 crore. Its interest outgo continues to remain high at Rs.824.26 crore while depreciation was at a hefty Rs.1104.98 crore. The company incurred an exchange loss of Rs.303.43 crore, which included unrealised translation loss of Rs. 254.19 crore on convertible alternative reference securities (CARS) issued in September 2007.
The proceeds of CARS were utilised to eventually fund the acquisition of Corus, and hence in the long run would consequently mitigate the risk of exchange fluctuations.
Consolidated PBT thus stood at Rs.4807.61 crore as against the standalone PBT of Rs.2274.85 crore. PAT was at Rs.3900.90 crore.
Tata Steel has just 5 million tonnes of its total capacity of 28 million tonnes in India, and rest comes from Corus and its other operations in Southeast Asia. Tata Steel and Corus sell more than two-thirds of their production in Europe. While Tata imports a third of the coal needed for its Indian plants and mines its own iron ore, Corus buys both the raw materials. The company is looking at forming iron-ore and coal ventures in Mozambique and is also scouting for limestone ventures in Oman, to secure raw material supplies.
The fact that the company has not provided for the erosion of the pension fund on MTM is not a negative. It is the standard accounting practice followed in UK. But what is to be seen is where this erosion or maybe an appreciation stands at the end of the year. Now that would be the decisive moment.
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