Tata Steel: Weak basics to cap further gains

Sale of European assets is positive, but turnaround in Europe is still far as demand remains depressed

The domestic outlook for steel companies has improved. News of Tata Steel restructuring its European operations has also been welcomed by the Street. The company, which has been shedding its European assets and workforce, is now selling its Clyde Bridge and Dalzell plants to the Scottish government, which will sell these to metals group, Liberty House.

Tata Steel is also negotiating the sale of the rest of its long-products European business to Greybull Capital. It is also considering options to further cut workforce in Europe. With global steel prices under pressure and headwinds in Europe, operating loss in Tata Steel’s European operations has widened in the past few quarters.

With no signs of an early turnaround, sale of assets (especially long-products portfolio) is seen as a better option to meet debt repayment obligations. Against this backdrop, Tata Steel’s stock has surged to an eight-month high and trades at Rs 304 now. While steps to turn around the European operations have improved sentiments, analysts say the results will take time to add up.

 

Meanwhile, rising domestic steel prices after the imposition of minimum import price (MIP) and the Budget's boost to infrastructure bode well for Tata Steel and the industry. Rising iron-ore prices are also a good sign for Tata Steel, which has captive iron-ore supplies. Earlier, the crash in iron-ore prices saw integrated players lose their edge.

 

Thus, Tata Steel is now expected to post better operating performance in the March quarter, aided by a 13 per cent (Rs 3,200 per tonne) rise in domestic steel prices since February (after MIP implementation). Its Ebitda (earnings before interest, taxes, depreciation, and amortisation) per tonne for the December quarter, at Rs 6,375, was much better than peers — JSW Steel at Rs 3,500 and Sail (Steel Authority of India Ltd) reported a loss.

Rise in domestic prices has been fuelled by MIP and China curbing its production, rather than improvement in demand. Further, the MIP is only for six months. Hence, improvement in demand is essential to drive further the fortunes of steel companies.

Benefits from higher volumes from Kalinganagar expansions will add up starting FY17 (analysts expect additional sales of one million tonnes, rising further in FY18). But due to uncertainties over demand in Europe and China and lack of green shoots in India, many analysts have ‘sell’ rating on the stock.