Tata Steel Q3 net Profit Plummets on Poor Realisation

India’s largest private-sector integrated steelmaker Tata Steel earning performance for the October-December missed the street expectations as weak European division showing and sluggish demand took its toll on profitability.

The company reported a net loss of Rs.1228.53 crore in the fiscal third quarter of this fiscal against a profit of Rs.1753 crore a year ago.

Consolidated revenue fell 8.9% on year to Rs 35,520 crore in October-December.

Earnings before interest, tax, depreciation, and amortization (Ebitda) nearly halved to Rs 3,659 crore in Q3, from Rs 6,726 crore in the previous year, while Ebitda per tonne fell to Rs 5,003 from Rs 10,404 in Q3 FY19.

EBITDA loss at Europe and weak domestic margins hurt the company’s operating performance.

Tata Steel’s net profit from India operations was Rs 1,194 crore, down 47% on year. Revenue fell 4.6% to Rs 21,299 crore even though steel sales rose 25% in the quarter to 4.85mt.

For Europe operations, the company reported its worst-ever quarterly performance with an EBITDA loss of Rs 960 crore.
Domestic margins are expected to recover from 4QFY20 due to a surge in prices. However, cost reduction initiatives in Europe are taking longer to yield results.

Following the subdued performance, Tata Steel share price slipped 5.4%, the highest fall in two months.
The weak performance prompted several brokerages slash their target price for the stock.
The impact of carbon costs would keep Tata Steel Europe margins under check.

Successful completion of the announced TSE business restructuring and the turnaround of the acquired Bhushan assets hold the key to achieve the guided $1 billion net debt reduction in FY21

Capex is likely to overshoot to Rs90bn vs. Q2 guidance of Rs83bn, largely on account of committed capex in both the Europe and India businesses

In India, Tata Steel has operations in Jamshedpur (10 MT), Kalinganagar (3 MT), Tata Steel BSL (5.6 MT) and Tata Long products (1 MT), aggregating to 19.6 MT. Indian operations’ key assets viz. Jamshedpur, Kalinganagar, Angul have a globally cost-competitive position, aiding overall EBITDA margins.

Going forward, Tata Steel is planning to increase India capacity to 30 MT by 2025 through organic & inorganic routes, thereby increasing share of higher-margin domestic capacity to 71% by 2025

We believe that with the Automotive prices slashed by Rs 6000/t in Europe (Automotive accounts for around 40% of the volumes there) and a tougher carbon regime, there could be sustained downturn in the steel business over the next few quarters unless the European Commission comes up with stringent Border Adjustment Tax (BAT) or enhanced support for R&D to help reduce CO2 emissions further.

We expect that the Coronavirus epidemic can result in production cuts in China, while a potential stimulus package to boost steel demand can result in a shortage of steel.

Also, there is a lot of steel inventory piling up in China, which can depress prices in the short term. And a sustained epidemic in China could bring down global economic activities and overall demand for commodities ahead

Net net we believe that the short term trends for Tata Steel look challenging and possibly Q4 FY20 is also likely to be painful for margins ahead.

Hence markets would look at the coming year with some optimism.

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