Demand recovery at home and abroad, price uptick may prop Tata Steel stock

The street will also keep an eye on pace of debt reduction and cash flows

Though Tata Steel’s Q2 results, restated to reflect the merger with Bhushan Steel (BSL), cheered up most analysts, the stock fell 1 per cent on Friday. Domestic sales and operating profits were below expectations, while Europe outperformed.

There are multiple global factors to consider. Steel prices remained range-bound in Asia, and rose in Europe. However, costs rose everywhere due to higher fuel (mainly coking coal) and iron ore costs.

Europe is expected to continue registering robust demand in the second half of financial year 2021-22 (FY22), but fuel prices could escalate in winter, and a strong fresh wave of Covid-19 there creates downside risk. In Asia, coking coal prices could ease on higher Australian production, while iron ore prices should ease or stabilise on lower Chinese demand, and large ore producers having worked out supply chain problems.

On the domestic front, steel demand is expected to pick up. Realisations could rise, with some of the Q2FY22 underperformance attributed to seasonal factors that hampered construction, which is a major consumer segment. The global auto industry continues to see production constraints, due to the short supply of chips.

Overall, assuming global economic recovery continues, steel demand could rise 4-5 per cent in FY22, with Europe witnessing double-digit expansion to offset Chinese weakness. Inventory value increased due to higher prices, and volume increased in Europe.

At the balance sheet level, deleveraging continued with Tata Steel focussed on retiring foreign debt. The company has been upgraded to investment grade. Though the cost of financing fell, working capital needs expanded and this meant somewhat lower cash flow.

Total consolidated revenue from operations was Rs 60,283 crore, which was higher than Rs 53,372 crore in Q1 and Rs 38,940 crore in Q2FY21. The YoY difference was because of the bull run in prices as deliveries dropped to 7.39 million tonnes versus 7.98 million tonnes in Q2FY21. Other expenses (mainly coking coal) rose to Rs 18,850 crore, versus Rs 14,847 crore in Q1. Ebitda adjusted for fair value revaluation and forex movements rose to Rs 17,810 crore, versus Rs 15,892 crore in Q1 and Rs 6,319 crore in Q2FY21.

The adjusted Ebitda per tonne was Rs 24,112, versus Rs 22,366 in Q1 and Rs 6,972 in Q2FY21. Cost of finance dropped to Rs 1,020 crore versus Rs 1,811 crore in Q1 and Rs 1,948 crore in Q2FY21. Reported net profit was Rs 12,548 crore, versus Rs 9,768 crore in Q1 and Rs 1,665 crore Q2FY21.

Adjusted Ebitda per tonne for domestic (standalone) business was Rs 30,739, which was lower than Rs 32,712 in Q1. A total of Rs 11,424 crore of debt was repaid in the first half with net debt reducing by Rs 5,100 crore. Free cash flow was kept at Rs 3,322 crore, despite a reduction of about Rs 900 crore in net cash.

The stock has returned an amazing 171 per cent this past year, but has slipped 3.2 per cent in the last month.