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Tata Steel: Outlook stays cloudy

Overcapacity and fear of Chinese exports may keep steel prices depressed

Tata Steel
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The costs for steel producers have come down sharply over the last few months. This should ideally be positive for steel producers, as coking coal accounts for 40 per cent of operating costs. But steel makers are not cheering just yet. In fact, has indicated falling raw material prices would further drag prices of steel products down.

Tata Steel’s June quarter numbers paint a rather grim picture of the industry, which is facing multiple risks. For starters, the sovereign debt situation in Europe has kept demand for steel capped. The story is no different in India, where the demand situation for steel appears soft. As a result, consolidated deliveries have shrunk by six per cent year-on-year and revenues have stayed almost flat, both annually and sequentially, at $6.08 billion (Rs 33,800 crore). In the near term, there are a few triggers for the stock. Even for Tata Steel India, deliveries have stayed flat annually, at 1.59 million tonnes (mt).

The company’s standalone business saw its Ebitda (earnings before interest, taxes, depreciation and amortisation) contract seven per cent sequentially and 10 per cent annually to Rs 2,780 crore. Though analysts were expecting operating profit to decline, the company has done better than expected as realisations have been better. However, higher costs have eaten into the profitability. Conversion cost increased 30 per cent y-o-y to Rs 26,000/tonne. This is due to higher power rates and other expenses. According to ICICI Securities: “The effect of higher realisations and lower raw material costs were nullified by increase in power costs and other expenses. Increase in power costs were expected to some extent, as Tata Power suffered during the quarter due to lack of availability of coal.”

In contrast, Tata Steel Europe has delivered an Ebitda of Rs 600 crore. Ebitda/tonne has increased from $8/tonne in Q4FY12 to $35/tonne in Q1FY13. Analysts say there are one-off items that have driven some of this. The company has earned £10 million from the sale of land in Port Talbot. Forex gains, have helped improve the operating profit.

The company has seen its consolidated debt increase to Rs 54,000 crore from the Rs 47,600 crore reported in 4QFY12. Analysts say this is partly due to translation impact and partly due to aggressive capex. The company has already spent $650 million on capex in Q1FY13. The market is not positive on the company’s stock in the near term. Macquarie has cut its earnings per share estimate for the company by 23 per cent and 13 per cent for FY13 and FY14, respectively. The main reason, it says, is the reduction in sales volume assumptions for both India and Corus. The brokerage says: “Also, we are now building in higher depreciation and interest costs, given the depreciation of the rupee.”

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