UPDATE 1-India's Tata Steel third quarter profit lags estimates
* Q3 profit 5 bln rupees vs 7.5 bln rupees estimate
* High costs, weak demand in Europe hurts margins
MUMBAI Feb 11 (Reuters) - India's Tata Steel Ltd posted a smaller-than-expected third quarter profit on Tuesday partly due to high costs in its main European market which squeezed margins.
Europe is Tata Steel's biggest market and production centre, following its $13 billion acquisition of Britain's Corus in 2007 that gave it a foothold in the region. But the company has struggled to reap benefits from the deal because of Europe's weak economic conditions over the past six years.
Tata Steel Europe needs to import both iron ore and coking coal from outside and that plus continued high energy costs have hurt margins.
The steelmaker posted a net profit of 5 billion rupees ($80 million) for the December-ending quarter, compared to a net loss of 7.89 billion rupees a year ago. Net sales rose 14 percent to 364.1 billion rupees.
Analysts had expected a profit of 7.51 billion rupees on revenue of 336.52 billion rupees, according to data from Thomson Reuters StarMine.
Karl-Ulrich Köhler, MD & CEO of Tata Steel in Europe, said the company's focus on cost and cash flow continued, which had supported the year-on-year improvement in core profit, despite lower margins.
"With European economic indicators improving, our efforts will better enable us to benefit from any growth in European steel demand, which remains at historically low levels," Kohler said in a statement.
The world's largest steelmaker ArcelorMittal last week forecast higher profits for this year and said steel demand in Europe was rising beyond just a restocking effect.
Tata is the second-largest steelmaker in Europe, which accounts for more than 60 percent of its total annual capacity of 29 million tonnes.
The company said European delivery volumes rose 6 percent from a year earlier to 3.19 million tonnes for the quarter and operating profit also improved, but the pace of improvement been slower than expected.
The European Union's apparent steel demand is expected to rise by 3 percent in 2014, regional steel association Eurofer has said. But Germany's steel association warned on Tuesday the expected recovery could get derailed by fierce competition and rising raw material and energy prices.
INDIA GROWTH HOLDS
Tata Steel, which recently expanded capacity at its Jamshedpur plant in eastern India to 10 million tonnes a year, said quarterly profit at the Indian business jumped 45 percent from a year ago to 15.19 billion rupees.
The company is bullish about the long-term growth prospects in the country, T.V. Narendran, its managing director for India and South East Asia, said in December. Tata Steel plans to commission the first phase of its 6 million plant in eastern Odisha state by the end of the next fiscal year.
Its Indian operations have traditionally been more profitable as it operates its own iron ore mines, the main raw material in steelmaking.
Ahead of the results, shares in Tata Steel closed 1.9 percent higher at 389.75 rupees in a Mumbai market that ended up 0.1 percent.
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