Tata Steel Ltd. (TATA) posted a better-than- expected 72 percent gain in fourth-quarter profit after selling a U.K. unit and forecast raw material costs will squeeze margins in the first half at its European operations.

Net income, including that of Tata Steel Europe Ltd., rose to $937 million in the three months ended March 31 from $546 million a year earlier, Chief Financial Officer Koushik Chatterjee said. The average of 25 analyst estimates compiled by Bloomberg was 18.1 billion rupees ($399 million). Sales at India’s biggest steelmaker rose 23 percent to $7.59 billion.

Tata Steel Europe, accounting for more than two-thirds of group output, buys all its raw material from the market as it doesn’t own any mines. Steelmakers paid 74 percent more for coking coal last quarter after record rains slashed production in Australia’s Queensland state, the world’s largest exporter of the fuel. Cash iron ore prices at Tianjin port in China rose 36 percent on average in the period.

“The pricing environment remains tough because raw material prices are moving far ahead of steel prices,” said Rakesh Arora, head of research at the Indian unit of Macquarie Group Ltd. in Mumbai. “While Tata Steel Europe is trying to get some raw material from its own sources in the fiscal year 2013, its impact will be visible in three to four years.”

Tata Steel shares have declined 18 percent this year, compared with a 13 percent drop in the benchmark Sensitive Index of the Bombay Stock Exchange. The stock fell 0.9 percent to 561.20 rupees yesterday in Mumbai. The results were announced after the market closed.

One-Time Gain

Tata Steel made a one-time gain of $561 million selling its Teesside Cast Products unit to Thailand’s Sahaviriya Steel Industries Public Co. at the end of March, Chatterjee said at an earnings conference yesterday in Mumbai.

Steelmakers are facing volatile prices after being forced to buy iron ore and coal for immediate delivery or in quarterly supply accords following the collapse of a decades-old annual pricing system.

Tata Steel Europe’s first-half profit margins will be squeezed because of raw material costs, Chief Executive Officer Karl-Ulrich Kohler told reporters yesterday in Mumbai. Prices, which were expected to decline, have remained at high levels, he said, without elaborating.

Tata Steel Europe plans to close part of a plant in Scunthorpe in northern England, threatening about 1,500 jobs, Tata Steel said last week. The unit has “no future” in its current form and needs to cut costs, Kohler said May 20.

Capacity use in Europe was 89 percent in the quarter, he said yesterday.

India Demand

Earnings will be shored up by Indian demand, which is expected to gain 10 percent year-on-year, Managing Director H.M. Nerurkar said at the conference yesterday. Profit in the quarter at the India unit fell to $383 million from $485 million a year earlier.

For the full year, Tata Steel swung to a group profit of 89.8 billion rupees, compared with a loss of 20.1 billion rupees a year earlier, the company said in a statement. Analysts had estimated a profit of 64 billion rupees. Sales climbed to 1.17 trillion rupees from 1.02 trillion rupees.

The company will pay a dividend of 12 rupees a share.

Raw material costs for the year jumped to 380.4 billion rupees from 310 billion rupees in the previous 12 months, the company said. Total expenses rose to 1.07 trillion rupees from 988.4 billion rupees.

Tata Steel raised 34.80 billion rupees in January selling 57 million shares at 610 rupees apiece in a follow-on public offer as part of plans to fund expansion and repay debt. The company also raised 15 billion rupees in March, in the nation’s first sale of rupee-denominated perpetual hybrid securities by a non-finance company.