Tata Steel: Better-than-expected performance lifts street sentiments

Weak steel demand, high debt are among concerns that weigh on forward outlook

Shares of Tata Steel rallied 5 per cent in intra-day trading on Tuesday, after the steel major posted better-than-expected operating performance for the March quarter (Q4). However, it ended the day only 1.7 per cent higher, as concerns over demand and debt weighed on Street sentiment.

While the impact of Covid-19 was evident on Q4 numbers, the beat in consolidated operating performance was led by the turnaround of Bhushan Steel’s operations (now Tata Steel BSL), operating efficiencies, and a good show by its European business (Tata Steel Europe).

Tata Steel India’s operations (including Tata Steel BSL and long products division) did feel the impact of the lockdown as sales volume declined 14.6 per cent year-on-year (YoY) to 4.03 million tonnes (MT). The pressure on demand also reflected on domestic realisation, which for standalone operations declined 8 per cent YoY and 10 per cent sequentially, according to analysts. Thus, Tata Steel India’s Ebitda (earnings before interest, taxes, depreciation, and amortisation) per tonne fell 8 per cent YoY to Rs 12,573.

Tata Steel BSL had a decent show. The operations, acquired in May 2018 for over Rs 35,000 crore, are seeing continuous improvement, and this led to its Ebitda per tonne rising 14.4 per cent to Rs 7,908 in the quarter under review.

Like the India business, European operations too are facing pressure, but the impact was lower than anticipated in Q4. Tata Steel Europe’s Ebitda of Rs 65 crore was down 96 per cent YoY on the back of weak demand and realisations, but analysts were anticipating a loss akin to the December quarter.

 

 

In this backdrop, consolidated revenue at Rs 33,770 crore met consensus estimate, while Ebitda at Rs 4,669 crore, though down 38 per cent YoY, was ahead of analysts’ estimate of Rs 4,321 crore.

Profit before exceptional items and tax at Rs 1,906 crore was significantly lower than Rs 4,241 crore reported in the year-ago quarter. The company made a number of impairments pertaining to its non-current assets in Europe, overseas mines and Indian operations, totalling Rs 3,406 crore. Thus, it reported a net loss of Rs 1,236 crore for the March quarter.

Moving forward, weak demand remains a key concern. The lockdown has impacted business and May had seen domestic steel demand fall 65 per cent YoY, given the pressures faced by consuming sectors, such as auto and construction. The company is currently relying on exports to mitigate the decline in domestic demand, but exports are less profitable vis-a-vis domestic sales.

Second, European operations may benefit from lower coking coal prices and restart of economic activities in Europe, but demand is still weak, point out analysts, who say the key is the success of ongoing restructuring attempts. The June quarter can see up to 40 per cent decline in operating profit of Tata Steel Europe, feel analysts, who expect that the company will report losses at the consolidated level during FY21.

Jyoti Roy at Angel Broking says overall the company’s operating numbers came in ahead of Street, but the outlook for the first half of FY21 is weak, given that operations have been significantly impacted both in India and Europe during the first quarter so far.

Tata Steel’s gross debt at the end of the March quarter stood at Rs 1.16 trillion, and net debt at Rs 1.05 trillion, are also a concern. Amit Murarka at Motilal Oswal Financial Services says the high net debt adds to concerns and may limit upside for the stock. The firm, looking at the unfavourable environment, has halved its capex (largely growth capex) to about Rs 5,000 crore for FY21 from Rs 10,400 crore last year.