Mixed outlook for Tata Steel stock as global demand remains soft

The medium-term future of Tata Steel can only be assessed by examining several separate trends. The domestic business is performing well, and the momentum will continue due to demand from an infrastructure push. However, the European business is struggling. The UK facility is undergoing a low-carbon electric arc furnace (EAF) makeover at considerable expense, along with negotiations with the union.

The Netherlands Blast Furnace 6 (BF6) has almost completed a maintenance/relining shutdown. Global demand is soft, with China, holding over 50 per cent of global production capacity, exporting 7-8 million tonnes (mt) in the third quarter (Q3) of 2023-24 (FY24). Higher Chinese exports may further depress global prices.

In Q3FY24, Tata Steel’s standalone revenue increased by 2 per cent year-on-year (Y-o-Y) to Rs 34,700 crore, in line with consensus. The standalone average selling price (ASP) was down by Rs 2,851 per tonne Y-o-Y to Rs 71,069 per tonne. The operating profit jumped 61 per cent Y-o-Y to Rs 8,200 crore, and the operating profit per tonne improved by Rs 5,716 per tonne Y-o-Y to Rs 16,905 per tonne, also above the estimate. An advantageous movement in the inventory value of chrome ore drove the decline in raw material costs.

The adjusted net profit rose 96 per cent Y-o-Y to Rs 4,600 crore, well above estimates. Standalone production stood at 5.1 mt (up 8 per cent Y-o-Y), and the company posted the best-ever Q3 sales at 4.9 mt (up 6 per cent Y-o-Y). Domestic crude steel production (including domestic subsidiaries) was up 6 per cent Y-o-Y at 5.3 mt.

The consolidated revenue declined by 3 per cent Y-o-Y to Rs 55,300 crore. The reduction was due to lower blended ASP, which stood at Rs 77,359 per tonne (down Rs 2,478 per tonne Y-o-Y). The consolidated operating profit jumped 55 per cent Y-o-Y at Rs 6,300 crore, solely due to India performance.

Europe reported an operating loss of Rs 2,900 crore. The consolidated blended operating profit per tonne stood at Rs 8,760 per tonne. The adjusted net profit for Q3FY24 stood at Rs 850 crore. Production stood at 7.6 mt (flat Y-o-Y), and sales stood at 7.15 mt (flat Y-o-Y). Operating loss per tonne for Europe stood at $175. There was a production shortfall due to end-of-life for UK assets and subdued European Union (EU) demand.

Gross debt declined Rs 1,500 crore quarter-on-quarter (Q-o-Q) to Rs 88,200 crore (from Rs 89,700 crore in the second quarter of FY24), and net debt stood at Rs 77,400 crore, with a liquidity position of Rs 23,300 crore. Net debt-to-operating profit ratio came in at 3.23x; net debt-to-equity stood at 0.78x in Q3FY24. Cash flow from India rose to Rs 9,016 crore, while consolidated cash flow was lower at Rs 7,879 crore.

Management commentary highlighted that coking coal cost in Q3FY24 rose $4 per tonne Q-o-Q and is expected to rise $10 per tonne in the fourth quarter (Q4) of FY24. Standalone realisations may decrease by Rs 1,000 per tonne in Q4FY24. The ASPs for the Netherlands are expected to be lower by £14 per tonne, but the UK selling prices may increase by £40 per tonne in Q4FY24.

The BF6 in the Netherlands will come on stream by the end of January 2024. The Kalinganagar facility will add 0.7 mt of volumes in 2024-25 and fully ramp up to 5 million tonnes per annum (mtpa) in 2025-26E. Both UK blast furnaces will be shut down by the second half of calendar year 2024, but the downstream facility will continue to operate.

The management sees higher EU realisations and volumes as BF6 comes on stream. Phase–III of planned expansions will scale up India operations. The eventual target is 40 mtpa capacity.

In the UK, the company has committed over £130 million in talks with the unions to support employees. In addition, there is £100 million funding for the transition board with the UK and Welsh governments. The new EAF is targeted to be commissioned in 2027.