The consolidated results of Tata Steel Ltd reflect a much better performance by its European business. While operating conditions remain tough, sustained efforts at lowering costs and improving efficiencies contributed to better profitability. Tata Steel Europe’s (Corus) consolidated earnings before interest, tax, depreciation and amortization (Ebitda) in the three months ended 31 December jumped to a positive $142 million (Rs653 crore), compared with a loss of $387 million in the September quarter.
The firm incurred a loss of $150 million due to the Teesside Cast Products (TCP) plant in the September quarter, but even after adjusting for this, the improvement in profitability is impressive. This was owing to cost controls, higher realizations and improved volumes, with each of these factors contributing in almost equal measure.
Graphic: Yogesh Kumar / Mint
The company’s domestic operations had benefited from higher volumes and realizations as well. The improvement in the performance of the company’s Europe and Indian operations compensated for a sequential drop in Ebitda in its other overseas subsidiaries.
Tata Steel’s consolidated Ebitda jumped to $731 million from $86 million in the previous quarter. That caused its share price to jump 6% on Wednesday as shareholders could finally see some benefits arising from the mega acquisition of Corus.
The European business is expected to benefit from its ongoing cost reduction programmes. But its capacity utilization will remain steady at current levels of around 80%. So sales and profit growth will depend more on steel prices, continued improvements in efficiency and lowering of costs. Tata Steel’s European business has saved around $1.2 billion in costs till December, with another $400 million of savings expected in the current quarter.
The mothballing of the TCP plant will result in one-time severance-related costs, but then it will also lead to a drop in employee costs. In addition, a planned $114 million investment to improve its supply chain will see annual savings of $100 million.
The operating environment for its European and Indian operations thus looks quite positive. The company does not expect demand in Europe to alter dramatically in the near future. While steel prices have been moving up, they have been rising partly on the expectation of higher raw material prices. When this actually happens after new contracts with raw material suppliers are negotiated, the ability to pass on actual cost increases to customers will be a key factor to watch for.
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