Favourable commodity cycle should keep Tata Steel stock in demand

Steel major Tata Steel (TSL) delivered results that beat consensus expectations but the share price reacted intra-session, on the news. This may have been due to profit-booking because the share had risen by 7 per cent in the past three sessions. After a volatile session, the stock closed up by 2.2 per cent on the National Stock Exchange.

In Q1, 2021-22, net profits, revenue and operating profits all rose sequentially over Q4, 2020-21 (QoQ) and over Q1, 2020-21 (YoY). The YoY performance was of course, driven by a low base but the QoQ improvement was positive despite being hit by the Second Wave which led to reduced steel consumption QoQ.

Commodity markets remain bullish and demand for the company’s products remains high. However, TSL had to contend with rising raw material costs including both higher iron ore and higher fuel costs. It was also forced to divert oxygen production for medical purposes. 

China’s policy-makers have cut back on steel production, which has helped TSL. Exports rose as a result. In general global demand is expected to rise by 5-6 per cent and EU demand is expected to rise by 11 per cent or more.

At consolidated level, TSL reported operating revenues of Rs 53,372 crore, with growth YoY versus Rs 25,475 crore and QoQ at Rs 49,977 crore. Note that production and delivery declined QoQ – higher prices compensated. The EBITDA of Rs 16,185 crore was a record, versus Rs 630 crore (YoY) and Rs 14,290 crore (QoQ). The EBITDA margin was 30.3 per cent.

The PAT was Rs 9,768 crore, versus Rs 4,648 crore loss YoY and versus Rs 7,162 crore profits (QoQ). The free cash flow was Rs 3,553 crore, and the company could deleverage by paying down Rs 5,894 crore of debt. Net debt is Rs 73,973 crore (June 2021) versus net debt of Rs 75,389 crore (March 2021). Deleveraging could have been higher except for a working capital build-up.

Exceptional items (mainly on account of Covid-19 protection for employees) reported a loss of Rs 183 crore, versus gain of Rs 58 crore (YoY) and loss of Rs 991 crore (QoQ). Inventories rose to Rs 3,292 crore due to lower deliveries and higher value of inventory held. The Finance Costs were held at Rs 1,811 crore, versus Rs 2,006 crore YoY and Rs 1,866 crore (QoQ). The EBITDA per tonne jumped to Rs 22,779 versus Rs 18,253 QoQ. TSL Europe did less well than India but still registered an Ebitda of Rs 1,533 crore versus a loss of Rs 626 crore (YoY) and profits of Rs 1,194 crore (QoQ). Europe had an EBITDA per tonne of Rs 6,590 versus Rs 4,841 QoQ.

The cycle remains favourable for steel-makers and there should be a pickup in India demand, if the Third Wave is not serious and the disruptions of Q1 don’t recur. The Budget’s infrastructure focus should create more demand. Europe demand remains strong as the global economic activity continues to pick up. Most analysts remain bullish on the stock.