Tata Steel: what India gives, Europe takes
Tata Steel Ltd’s investors will hope fervently that its European joint venture with Thyssenkrupp AG goes through. In the September quarter, Tata Steel’s India operations saw per tonne Ebitda (earnings before interest, tax, depreciation and amortization) increase by 4.3% sequentially. Sure, some of that is due to its capacity ramping up. But Europe, even if you consider this was a seasonally weaker quarter, saw per tonne Ebitda decline by 44.4% sequentially and by 42.3% over a year ago.
See what that did to its overall performance. Tata Steel’s consolidated net revenue rose by 9.5% sequentially to Rs32,464 crore but its Ebitda declined by 4.3%. This was mainly due to a decline of 39.9% in Europe. The company said that lower prices affected profitability, especially in hot-rolled coils. Rising imports appear to have led to lower prices. Lower production volume, although partly due to seasonal factors, also affected profits.
In India, while production and deliveries increased, selling prices improved marginally and costs declined due to lower coking coal costs. South- East Asia also did well during the quarter.
Tata Steel’s consolidated profit before tax and before exceptional items declined by 5.3% during the quarter. That result is going to disappoint investors.
What of its outlook? In India, the demand outlook appears to be improving but imports could be a threat. But the lift given to results by volume growth is likely to taper, as the company said that its Kalinganagar plant is close to “full ramp-up”. That will mean that realizations and operating efficiency will play a bigger role in determining how the India business does.
In Europe, seasonal weakness will continue due to winter and holidays towards the end of the quarter. While demand is expected to grow, the pressure from imports is likely to remain, according to the company. Iron ore prices have been declining in recent months, which can lower costs in Europe. Past volatility makes it difficult to predict if iron ore prices will stay low and there is that risk also, that steel prices may fall as well due to the fall in iron ore prices.
Tata Steel’s shares have risen by 66% since early-May and these results provide a reality check to investors. One could argue that its European steel business will be eventually housed in the joint venture with Thyssenkrupp. That should lower its impact on Tata Steel’s business and should be discounted for now. But there is a long way for that to happen, with end-2018 as the indicative closing date.
Till then, there are several quarters of results where the impact of the European business will be felt. Also, negotiations with unions need to show progress. The risk is if the process stretches for longer than expected, it can test the patience of investors.
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