Tata Steel: Europe's operating losses surprise

Analysts expect the stock to see further pressure

Tata Steel’s operating performance for the September quarter was below expectations. Tata Steel Europe (TSE) reported operating level losses of Rs 139 crore. Analysts at Angel Broking had expected Ebitda profit of Rs 984 crore, while those at Motilal Oswal had pegged Ebitda per tonne of $24 for TSE. While this is a big disappointment, more challenges are expected for the European operations as is indicated by the company’s statement. Tata Steel says market conditions in Europe worsened in the quarter as the UK continues to witness surge in imports and declining competitiveness of the manufacturing sector due to weak industrial demand, strengthening of the sterling and adverse regulatory and business conditions. While TSE continues to work on innovations and new profits, it had announced job cuts with closure of some sites in the UK.

  On consolidated basis, the company’s sales at Rs 29,069 crore fell by 18 per cent year-on-year and were 3.2 per cent lower than Bloomberg consensus estimate of Rs 30,034 crore. Excluding one-offs and profits on sale of investments, Ebitda at Rs 1,985 crore was half of Rs 3,997 crore in the year-ago quarter and way lower than Rs 2,426 crore estimated by Bloomberg. Gain from sale investments, lower taxes, etc helped the company report net profit of Rs 1,529 crore, compared to Rs 1,254 crore in the year-ago quarter.

In the domestic arena, Tata Steel India has been braving well. Steel demand continues to be weak because of subdued economic activity while surge in cheap imports is also hurting. Though the government raised tariff barriers, subsequent slide in steel prices has negated the gains. In spite of all these challenges, the company saw its deliveries increased by nine per cent to 2.33 million tonnes (mt). The value-added sales too increased by 30 per cent year-on-year during the quarter. Thus, the underlying Ebitda for the second quarter of FY16 increased 14 per cent to Rs 1,963 crore.

However, analysts expected it to come higher; the higher costs of raw material has disappointed slightly. Rahul Dholam at Angel Broking says he is awaiting clarity from management on whether the entire imported inventory of iron ore is consumed. Led by the higher than expected raw material expenses, Ebitda was lower than his expectations of Rs 1,918 crore at Rs 1,861 crore. The company, however, is moving well with its planned expansions of three MT capacities at Kalinganagar in Odisha.

While the Street had been anticipating some disappointment and consequently the stock had corrected 4.3 per cent to Rs 225.60 on Thursday, looking at Ebitda loss in European operations further weakness cannot be ruled out. Also, challenges in international arena will keep the stock under check moving forward.