Tata Steel Falls As Q1 Net Hit by Higher Impairment Cost

Tata Steel shares fell nearly 2 per cent on Thursday as its June quarter net profit fell below Street estimates on the back of higher impairment cost (Impairment cost is a reduction on a company's balance sheet due to adjustment of a company's goodwill. Goodwill is the excess amount a company pays to acquire an asset over its book value. As per accounting rule companies are required to monitor and test the value of their goodwill, to determine if it is overvalued. If a company finds its good will over valued then it must reduce its goodwill and must charge it to its profit & loss account). However broadly its numbers were in-line with Street estimates.

Tata Steel shares fell nearly 2 per cent on Thursday as its June quarter net profit fell below Street estimates on the back of higher impairment cost (Impairment cost is a reduction on a company's balance sheet due to adjustment of a company's goodwill. Goodwill is the excess amount a company pays to acquire an asset over its book value. As per accounting rule companies are required to monitor and test the value of their goodwill, to determine if it is overvalued. If a company finds its good will over valued then it must reduce its goodwill and must charge it to its profit & loss account). However broadly its numbers were in-line with Street estimates.

The company reported 11 per cent year-on-year (y-o-y) jump in its consolidated net sales to Rs 36,427 crore helped by a pick-up in its Europe business but its net profit fell 70 per cent y-o-y to Rs 337 crore due to an Rs 1,570 crore impairment loss on its 35 per cent stake in the Banga coal mines in Mozambique.

Analysts polled by NDTV had expected the company to report a net profit of Rs 1,135 crore on sales of Rs 35,825 crore.

Its Europe business registered 2 per cent y-o-y growth in steel sales volume. Profitability of its Europe business also increased as its ebitda/ton(gross profit on producing one ton of steel) came in at $52, a 11 quarter high.

Giriraj Daga, senior research analyst at Nirmal Bang Institutional Equities says European business of Tata Steel was a pleasant surprise and it will continue to do well. He expects its ebitda to improve in FY16 due to reduced cost raw materials which is yet to show its full impact on its costs.

Ebitda from its India business came in at Rs 3,260 crore which was in-line with Street estimates. Its India Steel volume also increased 5 per cent y-o-y.

Tata Steel has also cut its capital expenditure guidance for FY15 to Rs 12,000-Rs 14,000 crore from Rs 16,500 crore. Analysts say this will have a positive impact on its free cash flow.

As of 9.30 a.m. Tata Steel shares traded 1.38 per cent lower at Rs 527.15 underperforming the Nifty which was up 0.44 per cent.