Tata Steel: New Kalinganagar plant depresses India profits
Commissioning of Tata Steel’s new Kalinganagar (Odisha) plant has meant output is higher but the start-up costs are affecting profits
It’s unusual to see Tata Steel’s European business report an increase in profits, while the India business reports a decline. In the September quarter, Europe’s profit rose by 20.8% sequentially while India’s profit fell by 10.6%. India’s profit declined over a year ago too.
The commissioning of Tata Steel’s new Kalinganagar (Odisha) plant has meant output is higher but the start-up costs are affecting profits. Initially, the output is of lower grade while the cost of production is higher. Also, lower prices of long products were a reason for the poor performance.
The company’s European business did better on the back of better prices, leading to better spreads, with improvement visible in both the UK and Netherlands. The sale of its long products business too has meant that the product mix was more favourable in the quarter. Profit improved although output was lower.
Overall, total sales rose by 4.5% sequentially and Ebitda (earnings before interest, taxes, depreciation, and amortization) declined by 8.4%, chiefly because raw material costs rose by 14.9% and other expenses rose by 5.9%. The Kalinganagar plant’s start has also meant higher interest and depreciation charges. That further whittled down its profit, and resulted in a sharp 75.6% decline in its profit before tax.
An improvement in its European business profitability, which was visible in the first quarter too, is good news. Iron ore prices are sustaining a firm trend in steel prices. But other raw material prices are increasing too, coking coal prices have shot up and pose a risk if steel prices don’t increase enough to cover these costs.
Profitability in India should improve gradually as the new plant stabilizes. Tata Steel is also expecting realizations to improve. While investors will be happy at the improvement in its European business, that will be tempered by the fall in profits in the company’s home market.