Margin outperformance in the June quarter has been due to the lagged impact of raw material pressure.
So, the Street is rather surprised with higher-than-expected numbers of Tata Steel. The major reason for this is the performance of Tata Steel Europe. Tata Steel’s consolidated Ebitda came in at Rs 4,400 crore, compared to the consensus estimates of Rs 3,800 crore. The company’s Indian operations posted Ebitda per tonne of $440 (up 10 per cent sequentially), while European operations came in at $78 a tonne (a 48 per cent sequential growth). While sales were mostly in line with the Street’s estimates at 3.5 million tonnes, adjusted margins were much ahead of expectation at $78 a tonne. This was primarily on account of higher-than-expected realisation of $1,313 a tonne. Analysts claim the main reason for this outperformance in margins is the temporary mismatch between raw material prices and market prices. Indian operations benefited from low-cost coking coal during the first quarter, but this will change in the second quarter.
Analysts expect European operations to come under pressure after the June quarter, due to weaker prices and lagged impact of higher costs. While European hot-rolled coil (HRC) prices have fallen seven per cent in the past three months, HSBC Global projects that European steel prices will increase from September, as price premiums to China have dropped below $100 a tonne (hence lower imports). According to Bank of America Merrill Lynch, domestic margins are likely to have peaked and should trend lower, as steel prices fall and the cost base remains stable due to integration. The management expects slower demand over the next three-six months in Europe, as uncertainty has increased significantly. In India, however, the demand remains stable, but prices are expected to drift slightly downward.