Favourable domestic realisations, deals to keep Tata Steel's prospects firm

Tata Steel’s strong domestic margin improvement during the September quarter, which was ahead of estimates, has increased the Street’s confidence about the company’s prospects. The profitability trend is likely to continue, aided by supportive domestic steel prices, turnaround in acquired Bhushan Steel operations, and Kalinganagar expansions (5 mtpa Phase-II expansion started recently), observe analysts. 

With expected debt reduction over the next year, brokerages are bullish. Analysts at Edelweiss Securities expect the performance to be driven by domestic operations on the back of stable spreads, ramp-up at Bhushan Steel, and the possibility of an improvement in its profitability.

The company has reported domestic per tonne profitability at Rs 19,242, up 73.7 per cent year-on-year, or YoY (11.1 per cent sequentially), while analysts say, adjusted for one-offs, it is at Rs 18,100 levels (still up 65 per cent YoY). This is much higher, compared to peers such as JSW Steel’s Rs  12,389.  

The stock, however, has been under pressure in the past few months. Analysts at Prabhudas Lilladher attribute the current weakness to initiation of investigation in the proposed joint venture (JV) of Tata Steel Europe (TSE) with ThyssenKrupp, and uncertainty over acquisition of Bhushan Power and Steel. 

The investigation initiated by European Commission is a routine exercise and, given the seriousness of both the partners, remedial action will be taken to address the concerns of authorities, say analysts. With regard to Bhushan Power & Steel acquisition, analysts observe Tata Steel may not go too aggressive since Usha Martin’s acquisition has fulfilled objectives of expansion in the long products basket.  

Abhisar Jain at Centrum Broking says there are expectations about further inorganic acquisition efforts taking a backseat. The brokerages are of the view that strong domestic cash flows will pave the way for deleveraging. 

The second quarter results have been well above consensus estimates, but the key positive is a clear indication on deleveraging ahead by $1 billion over the next 12 months.

Debt reduction is expected to be led by internal accruals and strategic initiatives. This does not factor in debt reduction, with the formation of the JV with ThyssenKrupp for the European business. Net debt has been flattish, sequentially, at $15 billion at the end of the September quarter.