Tata Steel: Rising demand, steel prices and integrated ops bode well

During Q2, Tata Steel not only achieved its highest-ever domestic deliveries of 5.05 million tonnes (MT), volumes at its European operations too, rebounded to year-ago levels

Tata Steel’s provisional volume numbers for the September 2020 quarter (Q2) impressed the Street, and rising demand and steel prices also point towards an improving business outlook. 

Being an integrated steel producer, the company remains largely insulated from rising prices of key raw material such as iron ore. Not surprising then, that the stock is among the top picks of foreign brokerages, which foresee further improvement in volumes and profits led by its India operations.

In Q2, Tata Steel not only achieved its highest-ever domestic deliveries of 5.05 million tonnes (MT), but volumes in its European operations too rebounded to year-ago levels. India volumes grew 72 per cent sequentially and 22 per cent year-on-year (YoY), and Tata Steel India is now running its steelmaking and downstream operations at pre-Covid levels, with all major sites operating at close to full capacity.

Its profitability is also likely to rebound as domestic steel prices continue to rise and product mix improves. The share of exports decreased to 24 per cent of volumes in Q2 from 50 per cent in Q1. 

The company had relied on higher exports in Q1 to compensate for lower domestic sales, even though exports fetch lower margins. Q2 volume growth has been driven by auto (up 10 per cent YoY), industrials and projects (up 13 per cent YoY), and retail (up five per cent YoY) sectors.

Overall steel demand in India is improving, say analysts, largely led by more profitable flat steel products (used in auto, white goods). 

With recovery expected in long steel demand after the monsoon (as construction activity picks up), analysts at Motilal Oswal Securities expect domestic steel consumption to normalise in the second half of FY21.

Steel prices, too, have rebounded to pre-Covid levels after hikes of about Rs 5,500 a tonne in Q2. 

Hot-rolled coil (HRC) prices ex-Mumbai at Rs 38,900 a tonne are now at March quarter levels. 

Fresh price hikes have already been announced after the monsoon.

Moody’s Investor Services had recently said that the outlook for the global steel industry over the next 12-18 months was stable. 

Higher global prices will not only boost export margins, but reduce imports into India too. Steel imports have declined 51 per cent YoY to 1.99 MT in first six months of FY21. These developments suggest that prospects will also improve for Tata Steel Europe (TSE), which clocked volumes of 2.3 MT (up 14 per cent sequentially) in Q2, similar to year-ago levels.

Meanwhile, for Q2, analysts estimate Tata Steel to report consolidated per tonne profit of Rs 11,700, significant higher than Q1’s Rs 2,105, and expect more gains ahead. 

Consequently, some analysts have target price of Rs 500-plus for the stock, which is trading at Rs 375.55.