Tata Steel’s phenomenal performance clearly shows that all apprehensions about the recent weakening in global steel prices impacting Tata Steel’s performance in the fourth quarter were unfounded. In fact, average realisations in the fourth quarter improved 3 per cent.

The question, of course, is whether this is likely to continue. According to the company, prices are expected to stabilise due to a growth in demand as well as a reduction in inventories piled up in the fourth quarter. With shortage of iron ore, scrap and metallurgical coke continuing, analysts do not expect any considerable downward movement in prices.

The improvement in average realisations in the fourth quarter can be attributed to a couple of factors. First, exports constitute only around 15-18 per cent of total sales volumes and hence compared with other steel companies, the impact and subsequent variability in revenues and profits is mitigated. Realisations in the domestic market, in fact, improved around 3 per cent compared to the third quarter.

Secondly, a significant part of the company’s sales are on contract. While 11 per cent of the company’s sales were on annual contracts last year, 64 per cent were on monthly contracts, with only around 8 per cent on spot basis. Clearly, the impact of weakening of prices will not be immediate.

Tata Steel intends to further reduce exposure to the spot market and increase the share of annual and monthly contracts. Incidentally, while most companies have been exporting a greater proportion of production, Tata Steel has maintained a policy of exporting around 15 per cent of volumes. What is striking is the fact that domestic realisations are higher than export realisations.

Also, the variability in export realisations is greater than in the domestic market. Nevertheless, the improved price scenario and the higher proportion of value-added products like cold-rolled steel (28 per cent compared to 20 per cent in FY02) was reflected in the results in a major way.

As a result, operating margins improved 990 basis points to 26 per cent in the quarter. The increased cash flows and subsequent repayment and re-negotiation of debt led to a reduction in net interest outgo in the quarter by 8.6 per cent.

For FY03 too, lower capex last year led to lower gross and net interest outgo by around 15-17 per cent. To capitalise on the global shortages, Tata Steel intends to expand iron ore production by around 3-4 million tonnes. Also, it has a plan to expand capacity of long and flat steel products (hot-rolled, cold-rolled and galvanised sheets) by 50 lakh tonnes each.

Rebuilding another furnace similar to the one done last year will also enhance its capacity to produce steel. With the capex of Rs 1,700 crore expected to be financed largely through internal accruals, the declining interest outgo will likely continue. Therefore, earnings growth is expected to continue, even though the pace may slacken.