BOMBAY (Reuters) - Tata Iron and Steel Company Ltd. reported on Thursday a 44 percent rise in profit on higher prices and an improved product mix, but its shares fell as India's second-largest steel maker saw its margins shrink.

TISCO, India's oldest steel maker and part of the diversified Tata group, said net profit rose to 9.08 billion rupees ($209 million) in the March quarter from 6.29 billion a year earlier.

The stock surrendered early gains to end flat at 356.95 rupees in a firm market, as operating margins fell to 37 percent from 42 percent the previous quarter due to higher input costs.

Power costs jumped 14 percent in the past quarter, while the cost of finished and semi-finished steel shot up 50 percent.

"The next few quarters will see only volume growth," said Rahul Jain, an industry analyst with Refco-Sify Securities India, who has a buy rating on the stock. "Probably this is the best quarter in terms of prices."

Net sales rose to 38.65 billion rupees from 32 billion a year earlier. A Reuters survey of five brokerages had forecast the firm to post a median net profit of 7.8 billion rupees on sales of 37.85 billion rupees.

Jain expects its earnings per share (EPS) to rise to about 75 rupees in the year to March 2006 from 62.77 rupees last year.

The Reuters consensus estimates is for 69 rupees, meaning the stock trades at a price-to-earnings multiple of 5.2, making it the most affordable stock among Bombay's 30 blue-chip shares.

TISCO shares are down 7.4 percent in 2005, compared with a 2 percent decline in the benchmark Bombay share index.

Fourth quarter steel production fell 5 percent on last year to 980,353 tonnes. For four months until early April, TISCO's largest blast furnace had been shut down to raise its hot metal capacity to 5.2 million tonnes from 4.35 million.

TISCO derives about 85 percent of its revenues by selling to customers on long-term contracts, and only the remaining 15 percent comes from spot trades.

"The strong results were driven by better product mix," said Kshitiz Prasad, a steel analyst with Anand Rathi Securities Ltd.

But with steel prices showing signs of easing, investors are unsure if TISCO and other steel producers will be able to match the bumper profit growth of the past two years.