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Tata Steel’s consolidated profits may be slightly lower than the Street’s expectations, but that was due to a spike in losses in the Southeast Asia business which reported an Ebitda loss of Rs 281 crore in September quarter versus a profit of Rs 129 crore in the year-ago period. Importantly, the key constituents namely, Tata Steel India and Tata Steel Europe’s numbers, instil confidence and were ahead of expectations. The Ebitda per tonne for Europe at $46 was better than anticipated $39 to $45 by various analysts. Ebitda per tonne for India operations at Rs 14,660 was also better than most analysts’ expectations of Rs 14,000-14,557 — only a few were more optimistic and were expecting it at Rs 15,000 levels.
The company’s India volumes at 2.11 million tonnes (mt) were in line with Street expectations, while Tata Steel Europe's at 3.36 mt was slightly lower than 3.5 mt anticipated.
Thus, due to the loss at Southeast Asian operations, Tata Steel’s consolidated Ebitda at Rs 3,643 came lower than Bloomberg consensus estimates of Rs 4,057 crore. There are some pressure points in the region besides squeeze in spreads.
“The construction outlook in the Southeast Asian countries continues to be positive. The PMI in Singapore remains in the expansion zone but the market remains under pressure due to cheap imports from China,” said T V Narendran, managing director, Tata Steel India and South East Asia operations.
However, the Street pays more heed to India and Europe that matter the most, together accounting for nearly 87 per cent of sales and majority of profits.
The consolidated revenues at Rs 35,777 crore were slightly lower than Bloomberg estimate of Rs 36,418 crore. However, net profit at Rs 1,254 crore came better than estimates of Rs 676 crore, helped by proceeds from sale of Borivali land (Rs 1,145 crore).
Though soft steel prices continue posing challenges especially for the European operations, weak raw material prices (iron-ore and coal) bode well. The better than expected Ebitda of Europe, which was the key highlight in the September quarter, was driven by operating leverage and should booster investor confidence. Focus on costs and notably, improving product mix and customer needs has helped the European operations post a remarkable increase in profits. Although sales fell 4.5 per cent year-on-year at Rs 20,202 crore, the business reported a 68 per cent year-on-year rise in Ebitda at Rs 929 crore.
“Our financial performance again showed how our product portfolio enhancement continues to build on the progress we've made so far. We are on track with our new product launch plans and with our programme to raise the proportion of differentiated products in our sales," Karl-Ulrich Kohler, managing director and chief executive officer of Tata Steel in Europe. However, he adds, “We see headwinds constraining steel demand growth globally. In Europe we are increasingly concerned about the impact of rising imports, particularly from China, on EU steelmakers.”
Regarding the company's decision to sell long product unit in Europe, Karl said, “The potential sale of our long products Europe business and its associated distribution facilities would enable us to devote greater resources to pursue our focus on strip steel customers.”
Indian operations, however, saw Ebitda margins falling 264 basis points year-on-year to 29.6 per cent in the quarter on soft realisations and higher costs. While some improvement in steel demand is expected in the second half of FY15, looking at the slump in international prices, concerns over Indian steel prices and risk of imports do remain. Soft coal prices bode well while iron-ore mining problems in Jharkhand are also likely to ease soon accruing benefits, and should provide support to profitability.
“The volumes in the domestic market were affected due to 36 days shut down for maintenance in the long products business. We also faced significant headwinds like softening of global steel prices, increased import pressure and weak domestic demand," said Narendran.
Narendran said the company's performance in the domestic auto segment was strong from same period last year despite a flat performance of the auto industry. “Our focus on product mix enrichment has resulted in a 22 per cent year-on-year increase of sales to the automotive segment and a 38 per cent year-on-year increase in the hi-end segment," he said.
Cost cutting measures for India operations has led to a savings of Rs 341 crore in the period under review taking the saving to Rs 670 crore in April-September period.
The expansions at Kalinganagar in Orissa should start driving volumes from the next fiscal though the iron-ore issues in the state still are yet to be resolved. Analysts expect India volumes to grow to 9.5 mt and 10.7 mt in FY16 and FY17, respectively compared with 8.5 mt in FY14.
As on September 30, the company's consolidated net debt stood at Rs 68,000 crore, down by Rs 1,600 crore from the preceding quarter. The company has completed refinancing of its $7-billion debt which has helped it save between 20-40 basis points on the average cost of borrowing and has also helped extend the tenure by five years, scheduling its first repayment in FY20.
Overall, on the back of sustained improvement in profitability and other benefits, the company should see better investor confidence. Goutam Chakraborty at Emkay Global says that he is likely to maintain his target price of Rs 571. Consensus target price as per analysts polled on Bloomberg since October 2014 stands at Rs 596 for the stock trading at Rs 468 levels.
