Tata Steel extends rally post Q4 results; stock zooms 97% since February

The management has guided for an increase in Q1FY22 realisations by Rs 6,000-7,000/tonne and spreads to improve by Rs 4,000-4,500/tonne on a sequential basis

Shares of Tata Steel moved higher by 8 per cent to Rs 1,185, their fresh record high on the BSE, in intra-day trade on Friday. The stock has gained 11 per cent in the past two trading days after the company reported its best-ever performance across metrics such as revenue, Ebitda (earnings before interest, taxes, depreciation, and amortisation), and net profit (excluding exceptional items).

At 12:11 pm, Tata Steel traded 6 per cent higher and was the top gainer in the Nifty50 pack of stocks. The benchmark index traded 0.40 per cent higher at the same time, meanwhile, its BSE counterpart Sensex was up 0.30 per cent.

With the past two days' gain, Tata Steel has now rallied 97 per cent since the Finance minister presented the Union Budget 2021-22 on February 1. In comparison, the S&P BSE Sensex is up 6.3 per cent during the same period.

Tata Steel reported a higher-than-expected consolidated net profit, attributable to owners of the company, at Rs 6,644 crore in the March quarter (Q4) of FY21 as against a net loss of Rs 1,481 crore in the corresponding period last year. Revenue from operations jumped 39 per cent year-on-year (YoY) to Rs 49,977 crore on the back of higher steel prices and strong volumes, leading to strong operational gains.

Tata Steel’s consolidated EBITDA for Q4FY21 came in at Rs 14,184 crore, up 48 per cent quarter-on-quarter (QoQ) and 196 per cent YoY. Tata Steel's standalone operations reported EBITDA/tonne of Rs 27,775/tonne while the European operations reported EBITDA/tonne of US$66/tonne.

The management has guided for an increase in the June quarter (Q1FY22) realisations by Rs 6,000-7,000/tonne and spreads to improve by Rs 4,000-4,500/tonne on a sequential basis.

Given the strong results, analysts now believe that Tata Steel will likely report an even-better April to June quarter performance as steel prices continue to rise. “We estimate the impact of iron ore sales at Rs 600/tonne sequentially. Its cash cost per tonne rose 8 per cent QoQ to Rs 36,318. With spot steel prices around Rs 9,000/tonne, higher than the Q4 average, Q1FY22 is poised to be even better,” said global brokerage CLSA in its report.

With captive iron ore availability, Tata’s India operations are a play on steel prices, said brokerage Motilal Oswal Financial Securities. "Given the prevailing higher prices, we expect the margin to be strong. We estimate Q1FY22 EBITDA at Rs 17,500 crore (+23 per cent QoQ), with standalone EBITDA/t of Rs 33,370/t. While Tata Steel Europe’s EBITDA should be strong in FY22E, sustenance would be key to meeting cash outflow requirements (capex, debt, and interest). Deleveraging should remain strong, despite the resumption of growth capex. We expect net debt to decline by a further Rs 18,800 crore in FY22E to Rs 63,800 crore," it added.

China's withdrawal of export rebates could drive a structural change in the international steel market; this could translate into lower Chinese exports and support global steel prices for longer, as per analysts at Antique Stock Broking.

"International iron ore prices remain elevated which would push up the cost curve for non-integrated players. Domestic steel prices are at a discount to import parity prices allowing companies to push through price hikes. Iron ore integration in the domestic operations enables the company to capture the increase in steel prices in profits," they said in a result review.