Street still cautious on Tata Steel

The strong March quarter performance of Tata Steel was primarily led by an uptick in profitability in India business and decline in losses in European operations.

The introduction of minimum import price (MIP) in February helped domestic steel realisations recover Rs 5,000 a tonne from the January lows. Per tonne average steel prices in the March quarter at Rs 33,500 were Rs 2,500 higher than the levels in the December quarter.

With realisations improving, the reduction in costs also drove its operating performance. Standalone Ebitda (earnings before interest, taxes, depreciation and amortisation) was at Rs 2,160 crore (up 44 per cent sequentially), while Ebitda/tonne came in at Rs 7,959. The Ebitda performance of the Europe business also improved, helped by cost rationalisation and rising spreads (difference between sale price and costs). Thus, at the operating level per tonne loss halved to $15, from $31 in the previous quarter.
 

With expected sale of loss-making UK steel assets, one might expect European profitability to improve further. Also, the full impact of better steel realisation in India will be felt in the June 2016 quarter. Domestic realisations are also expected to increase Rs 3,000 a tonne, sequentially for the June quarter. However, most analysts remain cautious.

For one, there are concerns on MIP. The MIP, imposed for six months only to protect the domestic industry from cheaper imports, might get renewed further but may not stay till FY18. Thus, there is a lack of clarity on the trajectory of steel realisations. Kamlesh Bagmar of Prabhudas Lilladher maintains his cautious view on account of depressed outlook on global prices, strong likelihood of relaxation in trade restrictions (by replacement of MIP with anti·dumping duties) and expensive valuations.

Further, while the company is looking at selling assets in Europe, the Street is watchful on valuations of the deal and how much debt reduction it can lead to. Also, European assets have liabilities as those of pensions associated, and there is no clarity whether the new buyer will be taking over such liabilities.

Analysts at Religare Institutional Equities say the European business should turn profitable in FY17, due to the lag impact of rising spreads. However, assuming India clocks an Ebitda/tonne of Rs 11,000 and Netherlands $60 (similar to Arcelor Mittal’s), the scope of net debt reduction is negligible in FY17, given the outflows pertaining to interest costs and capex.

Thus, analysts haven’t raised their price targets meaningfully from the current levels. The Tata Steel stock on Thursday closed up 0.2 per cent at Rs 325, on a day the broader indices gained nearly two per cent.