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Tata Steel’s performance in the fourth quarter suggests that it has become a leaner and meaner company, which has been able to change itself given the persistent tough times, especially in Europe. While the numbers at its Indian operations were expected to be strong, what has surprised the market was a robust performance from Europe. The market too has given its thumbs-up to the result by taking the stock price up by nearly 4% to over Rs 310.
Importantly, though the global and India’s scenario in the steel market remains subdued, Tata Steel’s performance is likely to improve from here onward given the structural changes made by the company in its operations. The company has reduced controllable cost in the UK by 200 million pounds, which is nearly 10% of its operational cost, without compromising on volume or quality.
Adding to this was a 13% improvement in volume growth, despite a depreciation of the euro against the British pound. The company expects to maintain its volume growth and EBITDA barring unforeseen events. EBITDA stood at $113 million as compared to $27 million in the fourth quarter of 2012 and a loss of $79 million in the previous quarter. This was on account of EBITDA per tonne improving from $8 per tonne in March 2012 to $33 per tonne in March 2013.
The company’s Indian unit posted an improvement in margin on account of consumption of cheaper imported coal and higher captive power generation. A 29% YoY volume growth was on account of higher sales of flat products. Importantly, the company was able to manage a higher EBITDA margin of 34% as compared to 31% in March 2012 in spite of higher imports. Part of this was due to India having one of the higher hot rolled coil prices among some of the biggest steel markets in the world.
EBITDA margins improve even as steelmakers continue battling demand blues
Write-down drags Tata Steel Q4 net
While the company has undergone important structural changes, the external environment continues to be challenging. Steel demand, especially in the biggest market, China is expected to fall. The high levels of inventory and new capacities coming up in Japan and Korea are expected to add pressure to steel prices. Capacity utilisation, which has improved in the recent months, is being attributed to stock piling, and is expected to come down again.
In India too, there are little signs of improvement in demand. Coupled with rising imports and new capacity coming on stream (Tata Steel will be adding 1 million tonne), there will be some pressure on realisations.
But there is little doubt that Tata Steel has demonstrated its flexibility in standing up to challenging times. The stock has corrected from a high of Rs 440 to the present levels, about 30% and is factoring in most of the negatives. The company has also denied any asset sale in Europe, given its strong performance in the continent; this itself is a bullish statement, which can act as the present level of share price being a strong base.
