BackTata Steel’s India business to see volume-led growth in December quarter
Tata Steel's Q3 results should see good growth in sales, although how much of that flows to margins also depends on how its input costs behave
Premium
Tata Steel Ltd’s steel sales have risen in its main markets of India and Europe. That should be good news for shareholders as rising output in an environment of rising prices is good news for steel producers.
In its quarterly volume update, Tata Steel’s India sales of steel have risen by 10.4% over a year ago and by 7.1% sequentially.
While a low base effect is one reason for the growth over a year ago, the sequential improvement after the roll-out of the goods and services tax (GST) is significant, too. Sales of value-added products, where it earns better margins, led this growth. Domestic steel prices have risen in the December quarter. A report on metals by Kotak Institutional Equities showed rebar prices having risen by 24% over a year ago, while hot rolled coil prices have risen by 7%.
In Europe, Tata Steel’s sales rose by 3.4% over a year ago and declined sequentially, but that is a seasonal decline in demand due to winter. But Tata Steel pointed to output recovering sequentially as a sign of recovery post-annual maintenance shutdowns. While SouthEast Asia is a relatively small market for the company, this region did not do well with both output and sales declining, both over a year ago and sequentially.
Tata Steel’s December quarter results should see good growth in sales as a result, although how much of that flows to margins also depends on how its input costs behave. Steel makers have been hit by a sharp increase in coal costs (eased a bit in the September quarter) and iron ore prices as well.
Still, steel prices have been rising, and that could help absorb higher costs. In the September quarter, the firm’s Ebitda/tonne in Europe declined sequentially although the India business’ margins rose. Ebitda is short for earnings before interest, tax, depreciation and amortization, an indicator of operating profitability. If in the December quarter, Europe regains lost ground, it could give a considerable push to margins. Also, India’s profitability per tonne is the highest, and in the December quarter, India’s Ebitda/tonne was Rs11,078 compared with Europe’s Rs2,896.
Tata Steel’s shares are up by 16.5% since October. This is chiefly due to the steel industry’s prospects looking better and because its European business is set to be spun off into a joint venture (JV) with Thyssenkrupp AG. In the longer run, Tata Steel’s expansion plans, the final structure of the European JV, and its bid to acquire domestic distressed steel assets are events to look out for. Even as it does these, what investors are expecting is a steady improvement in cash flows, better return on capital and a lower debt to equity profile.
Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!
