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Lately, metal stocks have been the talk of town as they have benefitted from a global rally in steel prices and rise in demand.

Steel giant Tata Steel continued to reap these benefits in the June quarter as well, as the company on Thursday reported robust earnings.

Tata Steel’s net profit soared on the back of a global rally in steel prices and improved performance in the European business.

While many companies have reported a muted performance on sequential basis, Tata Steel’s numbers said otherwise, showing that it had a minimal impact of the second wave.

Key financials

Tata Steel beat street estimates as it reported a record consolidated net profit of 97.7 bn during the quarter.

This is a huge improvement versus its highest-ever consolidated net loss of 46.1 bn in the same period last year. The profit was higher than the full-year net profit reported by Tata Steel for fiscal 2021.

Tata Steel’s topline more than doubled to 533.7 bn on a year on year (YoY) basis.

On the back of rising steel prices, the company reported its highest-ever EBITDA, which increased 25.7 times on a YoY basis to 161.9 bn.

Steel deliveries, which were severely impacted due to the national lockdown around the same time last year, recovered well and were up 33% YoY at 7.1 m tonnes.

However, the impact of the second wave led to a fall of 9% in deliveries on a sequential basis.

Steel production was impacted by the supply of liquid medical oxygen to hospitals, leading to a moderate decline of 1.7%.

Here’s a table comparing Tata Steel’s results on key parameters.

 

Financial performance.
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Financial performance.

Commenting on the stellar performance, Tata Steel’s MD and CEO, TV Narendran said,

Over the last 15 months, the global economy has been recovering driven by policy support and progressive vaccination which has led to improvement in business and customer confidence.

However, Indian markets were adversely impacted again during the last quarter due to the 2nd wave of Covid-19, which impacted our steel production as well as deliveries.

He added that demand has begun to recover, though domestic steel prices continue to be at a steep discount to China import parity prices.

European business

Tata Steel’s sales performance in India operations were flat sequentially but doubled on a YoY basis to 303.4 bn in the June quarter.

The highlight of June quarter was its European business. The European business had an improved quarter, with the impact from rising steel spreads expected to positively benefit in the coming quarters.

Decreasing debt and solid capex

Tata Steel’s gross debt decreased to 842.4 bn during the quarter. It repaid debt worth 58.9 bn. Net debt fell to 739.7 bn, which improved its net debt to EBITDA ratio.

The company’s was able to generate free cash flow worth 35.5 bn despite working capital absorbing 82.7 bn.

Tata Steel spent 20.1 bn on capital expenditure (capex) during the quarter, with the ongoing work on the pellet plant, the cold roll mill complex and the 5 MTPA expansion at Kalinganagar. The Kalinganagar phase-II expansion will drive product mix enrichment and cost reduction.

The company is expecting to bring down its debt significantly by the end of current financial year.

In short, all of Tata Steel’s key metrices improved.

Outlook

In its investor presentation, Tata Steel said that it expects global steel demand to expand by 5.8% in current year 2021.

On steel prices, it said Asian steel prices are expected to remain elevated amid supply tightness with strong demand recovery, stricter production curbs, and high coking coal prices in China.

The same is expected for Indian steel prices.

Equitymaster on the steel sector

Here’s what Tanushree Banerjee, Co-head of Research at Equitymaster and editor of Forever Stocks, wrote about the steel sector in one of her editorials.

After languishing for years, the reason these stocks are finding so much favour among investors are not difficult to fathom.

India's revival and the post Covid recovery of corporate India is heavily dependent on new demand.

The government has tried to stoke such demand with PLI (production linked incentive) schemes.

To say this has worked would be an understatement.

MNCs like Apple, Samsung, Dell and Foxconn are all lining up to set up capacities in India.

All of this has taken the projected demand for steel several notches higher than anticipated.

So, the demand outlook for steel is looking rosier than ever before. Add to that the chances of higher pricing and sale of premium products.

Meanwhile, ace Technical Analyst at Equitymaster, and editor of the premium monthly recommendation service Fast Profits Report, Brijesh Bhatia is bullish on the steel sector.

In fact, Brijesh also made a video at the start of this year on the steel sector. As per him, steel is the one sector where he thinks 2021 could see a huge uptick.

His call has been on the mark so far.

In case you haven't seen the video, you can access it here.

How the stock markets reacted to Tata Steel’s earnings

Tata Steel share price opened the day down by 0.6% at 1,414 on the BSE, against its previous close of 1,435.

As the session progressed, it reversed losses and rose 1% to 1,457.

Shares again succumbed to profit booking and fell 1% to 1,395.

Ahead of its earnings, Tata Steel shares gained momentum as a rating upgrade by S&P Global Ratings improved sentiment. This is its second rating upgrade in 2021.

Reports suggest that an improving balance sheet is aiding Tata Steel’s sentiment as it uses record-low interest rates to trim liabilities.

Tata Steel shares have a 52-week high quote of 1,481 touched last month on 29 July.

They have a 52-week low quote of 343 touched on 24 September 2020.

Up about 246% in the past year and 123% since the start of January 2021, Tata Steel is the top performer of BSE Sensex and NSE Nifty, on course for its biggest annual jump since 2009.

If compared from the lows of 254 touched in March 2020, Tata Steel shares are up a whopping 465%!

Tata Steel stock performance.
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Tata Steel stock performance.

At the current price of 1,430, the company commands a marketcap of 1,721.6 bn.

About Tata Steel

Tata Steel commenced operations in 1907, with the establishment of India’s first integrated steel plant.

At present, Tata Steel had a global crude steel production capacity of 32.3 MTPA across Jamshedpur, Kalinganagar, South East Asia, Tata Steel BSL and Europe.

The Tata group company has presence across the entire value chain of steel manufacturing from mining and processing iron ore and coal to producing and distributing finished products.

It offers a broad range of steel products including a portfolio of high value-added downstream products such as hot-rolled, cold-rolled, coated steel, rebars, wire rods, tubes and wires.

(This article is syndicated from Equitymaster.com)

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