Tata Steel's stock was up 5.6% to Rs 172.35 per share on Friday, a day the Sensex closed 0.71% down, after it announced consolidated results for the quarter ended December. The company posted a profit as against street expectations of loss at the net level.

Profit stood at Rs 813.89 crore after accounting for minority interest and share of profit of associates. This represents a 42.5% decline over the same period last year when the profit stood at Rs 1,415.54 crore. Hedging gains and better price realisation helped profits.

Revenues grew 4% to Rs 33,191.01 crore, helped by a weak rupee and price realisation of $1,120 per tonne. Volumes fell 24% to six million tonnes. Operating performance was weak as expenditure rose at a faster pace of 8% and an inventory of Rs 1,744 crore was written down. Operating margins, or operating profit expressed as a percentage of revenues, fell 352 basis points (100 basis points make one percentage point) to 8.61%. Margins were also hit on account of higher raw material and power costs.

Analysts see the company's Indian operations performing relatively better going forward, aided by the recent cut in excise duty and renewal of long-term contracts for raw materials at lower prices. But, the European wing is likely to continue to be impacted by lower steel demand. Cash position at Corus should improve in the current quarter as well, on account of production cut and inventory write-down.

Analysts Jagdishwar Toppo, Nitesh Jain and Bikash Bhalotia of Enam Securities maintain that Tata Steel's India operations are best placed on low-cost positioning. "However, Tata's global operations could remain under pressure due to a 40% output cut and high-cost contract for iron ore and coal," they wrote in a report dated February 27.

At Rs 159.35, the Tata Steel stock trades at four times its estimated earnings for 2010. Valuations appear attractive at these levels, but near term appreciation appears limited. 

Pallavi Pengonda/ DNA-Daily News & Analysis Source: 3D Syndication