Profitability boost for Tata Steel in June quarter

Domestic operating performance got a lift from better realisations as did Europe business

Tata Steel’s performance for the June quarter was driven by improving operational profit in domestic operations, which was led by minimum import price (MIP). Operating profit margins in Indian operations were up 313 basis points to 21.52 per cent in the quarter, while Ebitda (earnings before interest, tax, depreciation, and amortisation) per tonne at Rs 10,444 grew 19 per cent year-on-year.

Tata Steel Europe (TSE) saw operating profit more than double from Rs 325 crore in the year-ago quarter to Rs 856 crore, the result of restructuring and discontinuing loss-making operations. Even as European operations saw a 16 per cent dip in volumes to 2.68 million tonnes (mt), profit improved.

The company’s consolidated operating profit at Rs 3,242 crore came ahead of Bloomberg consensus estimate of Rs 2,892 crore.

The net profit was impacted due to provisioning for decline in value of investments and employee compensation. Further, as the company had decided to divest its stake in the UK-based long products business to GreyBull Capital and the losses (of Rs 3,355 crore) from discontinued operations were also accounted for, it led to a loss at the net level. Thus, while profit from continuing operations at Rs 172.19 crore grew seven-fold from Rs 21.7 crore in the year-ago quarter, after provisioning and losses, net loss was Rs 3,183 crore (Rs 317 crore a year ago).

The Street, however, may not be too perturbed, say analysts, as it is expecting more loss-making businesses being divested. The profitability in the European business has been a drag on consolidated performance for long, and will rebound with sale of loss-making assets as seen in the June quarter.

In India, even as Tata Steel may not have seen benefits on volumes due to planned shutdown at Jamshedpur, expect gains. The extension of MIP and implementation of anti-dumping duty should support realisations. Demand is expected to pick up in the second half of FY17, with a push from infrastructure and construction after a good monsoon. Domestic steel players had recently also hiked prices by about Rs 2,000 a tonne.

Thus, there are more positives that can accrue. However, after the over 20 per cent rally recently, many positives seem priced. But, as actual events like the sale of Port Talbot (part of TSE) assets and demand recovery occur, they will reinforce the Street’s confidence. The results came after market hours on Monday. But the stock closed at Rs 373.60 (down 5.3 per cent) as the broader markets corrected.