Demand uncertainty likely to keep Tata Steel stock under pressure

Tata Steel India (TSI) sales volume grew 11 per cent QoQ at 5.42 million tonnes (up 5 per cent YoY) but average realisation declined 5 per cent QoQ at Rs 67,592/tonne

The Q4 results of Tata Steel and management guidance indicated that operational difficulties in Europe and the UK continued to offset the steel major’s strong domestic performance. The consolidated operating profit grew 5 per cent quarter-on-quarter (Q-o-Q) to Rs 6,600 crore, which was down 9 per cent year-on-year (Y-o-Y) on strong India performance though Tata Steel India’s operating profit declined 2 per cent Q-o-Q to Rs 8,040 crore (down 7 per cent Y-o-Y).

Tata Steel India's sales volume grew 11 per cent Q-o-Q at 5.42 million tonnes (up 5 per cent Y-o-Y) but the average realisation declined 5 per cent Q-o-Q at Rs 67,592 per tonne (down 9 per cent Y-o-Y), with the revenue growth of 6 per cent Q-o-Q to Rs 36,600 crore. Auto segment sales volumes grew 6 per cent Y-o-Y, branded products and retail segment grew 1 per cent Y-o-Y, while industrial declined 5 per cent Y-o-Y. The export volumes grew 53 per cent Y-o-Y to 0.49 mt (9 per cent of total volume). 

The operating profit declined 2 per cent Q-o-Q while the raw material cost per tonne grew 9 per cent Q-o-Q to Rs 28,044 per tonne, while other expenses declined 14 per cent Q-o-Q to Rs 21,091 per tonne on better operating leverage, and lower royalty.

The operating profit per tonne declined 12 per cent Q-o-Q to Rs 14,846 per tonne. Gross debt declined by Rs 1,150 crore to Rs 87,100 crore but the net debt increased from Rs 77,400 crore to Rs 77,550 crore taking the net debt/operating profit to 3.31 times though cash position remained strong with Rs 31,800 crore.

In Tata Steel Europe operating loss was curtailed to $39 per tonne from the loss of $178/tonne in Q3FY24 as realisation declined 1 per cent Q-o-Q to $1,176/tonne while sales volumes increased 9 per cent Q-o-Q to 2.1 million tonnes on better Netherlands volumes. The Netherlands delivered higher volumes (up 10 per cent Q-o-Q) though this was offset by lower steel prices. The operating loss of the Netherlands improved from 91 pounds/tonne in Q3FY24 to loss of 20 pounds/tonne in Q4 and is guided to be operating profit positive in Q1FY25.

For Tata Steel UK, volumes grew 8 per cent Q-o-Q to 0.69 million tonnes (mt). The operating profit/tonne saw substantial improvement and operating loss of 55 pounds/tonne was much better QoQ given the loss of  £ 252 per tonne in Q3FY24. 

The end-of-life assets in Port Talbot UK are due for closure commencing in June and the investments into the 3 million tonnes per annum (mtpa) electric arc furnace will commence.

In Q4FY24 Rs 4,850 crore was spent on capex taking FY24 capex to Rs 18,210 crore. 

The phased commissioning of 5mtpa at Kalinganagar is progressing.

 In Q4FY24, consolidated steel production stood at 7.92mt (Y-o-Y up 2 per cent and up 4 per cent Q-o-Q) and sales stood at 7.98mt (up 3 per cent Y-o-Y and up 12 per cent Q-o-Q). The revenue was Rs 58,700 crore (down 7 per cent Y-o-Y and up 6 per cent Q-o-Q). The blended average selling price was at Rs 73,543/tonne in Q4FY24. For FY24, the production was 29.9mt (down 2 per cent Y-o-Y) and sales volume was 29.4mt (up 2 per cent Y-o-Y).

The domestic steel demand remains good though Q4FY24 and Q1FY25 suffered election overhang. The global demand is soft and Tata Steel still has to work through the operational challenges in the UK. The Netherlands production is better as blast furnace 6 is online.

The global steel demand/ pricing may have improved slightly Q-o-Q. The weak domestic Chinese economy remains a key issue since China’s steel production is flooding export markets. Bloomberg says 17 analysts have ‘buy’ recommendations, 7 have ‘sell’ and 8 have ‘hold’. The target prices are generally below the market price, indicating a potential downside.