The eurozone crisis could hurt the company’s performance in the next 2-3 quarters, but its move to enhance input security and raise domestic output would help profitability in the long run.
Slowdown growth and rising debt concerns in the euro zone are posing immediate challenges for Tata Steel. Steel prices in Europe are already down 12 per cent since March and may further correct in the next few months on weak demand, both of which need to be monitored.
Reflecting these concerns, the company stock, which drifted lower during April to July (from Rs 620 to Rs 572), has since fallen almost 23 per cent to record Rs 442.10 on Thursday, compared to the 15 per cent fall in the BSE Metal index. While the company is taking steps to control costs in its European operations, plans to improve profitability in the medium to long term are also underway.
| NEAR-TERM MARGIN CONCERNS | |||
| In Rs crore | FY11 | FY12E | FY13E |
| Revenues | 117,150 | 124,251 | 131,810 |
| Y-o-Y change (%) | 15.1 | 6.1 | 6.1 |
| Ebitda | 16,520 | 15,757 | 18,724 |
| Ebitda margin (%) | 14.1 | 12.7 | 14.2 |
| Net profit | 8,983 | 6,799 | 7,660 |
| Y-o-Y change (%) |
LTP | ||
Source: CapitaLine, Bloomberg analyst reports
Meanwhile, Tata Steel’s Indian operations are benefiting from lower steel production in Karnataka, as well as its strong distribution network. Going ahead, its 2.9-million tonne per annum (mtpa) domestic capacity expansion project is expected to start in the March 2012 quarter and add to its margins. Full benefits are expected to accrue by FY14. In this backdrop, analysts say the stock could head lower in the immediate future, though long-term prospects look healthy.
Analysts at Morgan Stanley say the company’s moves over the last two years to transform itself should reward it in the medium term and stock prices should trend meaningfully up in the next one year, notwithstanding near-term volatility. They feel the markets are overlooking the benefits of capacity expansion in India and growing raw material self-sufficiency in Europe.
CONCERNS ON EUROPE BUSINESS
Tata Steel Europe (TSE; erstwhile Corus) continues to battle the challenges. Steel prices in Europe have been correcting on the back of de-stocking and weak summer demand. Demand has reduced by one-third from what it was prior to the 2008 crisis. However, Ravindra Deshpande at Elara Capital, says: “Steel consumption in Europe is significantly lower than what it was in September 2008. So, if demand falls significantly from here, it will be a cause for concern, though the chances of further fall are limited.”
Recent reports by analysts at Macquarie suggest that though sequential falls in the August steel output are a norm in Europe, August has seen a larger decline (-13.7 per cent) compared to the previous year (-8.4 per cent). They said given the high fixed cost base, a drop or rise in output impacts profitability on a larger scale. Every 10 per cent fall in production would lead to a decline of $20-30 per tonne in Ebitda and a 20 per cent fall in consolidated EPS for Corus.
On the margin front, analysts expect pressure to be felt, as TSE continues to use high-cost raw material (iron-ore and coal). TSE’s Ebitda per tonne in the June quarter was down to $78, compared to $85 in the March quarter. The next few months will be more challenging, say analysts, post which the input cost pressure should ease.
TATA STEEL EUROPE: CUTTING COSTS, SECURING INPUTS
Tata Steel Europe continues to take measures to lower costs. Apart from closure of the bloom and billet mill in Scunthorpe, it has proposed a 1,500 reduction in manpower – 1,200 at Scunthorpe and 300 at Teesside. Besides, it plans mothballing the less profitable furnaces at Queen Bess (1 mtpa capacity) from September for reducing conversion costs. Recently, Tata Steel announced a ¤ 800-million five-year investment plan for its facilities at Ijmuiden, Netherlands, directed towards improving product quality and capacity, as well as reducing costs. As a consequence, its liquid steel capacities will increase from a half million to 7.7 mtpa, while jobs at the plant will be reduced by 1,000.
That apart, its stake sale of Riversdale mining assets in Australia in June has helped garner over Rs 5,000 crore, helping deleverage its balance sheet and lowering the debt-equity ratio from 1.7 to 1.3. Notably, the company maintained its interests in Riversdale coal assets in Mozambique (Benga project), which will start coal supplies to TSE post its commissioning in January 2012. Iron ore supplies will also be streamlined, with commissioning of an iron ore mining project in Canada in around a year. These will help secure inputs for TSE and add to margins in the long run.
TATA STEEL INDIA: ON A STRONGER FOOTING
While Europe poses challenges, Tata Steel India is benefiting (both in terms of premium and volumes) of the lower steel production from steel players in Karnataka due to the mining ban. Further, Bikash Bhalotia at PINC Research adds that it has de-risked itself from slowdown in projects in India by strengthening its retail presence through 28,000-strong dealer networks.
Meanwhile, Tata Steel India reported a much better Ebitda per tonne of $440 in the June quarter. However, a slight dip in the September quarter may be seen as an impact of high-cost coking coal, reckon analysts. Going ahead, margins would get support from the commissioning of its 2.9 mt Jamshedpur expansion in January 2012 (1.9-2 mt in FY13 and balance in FY14).
