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Business News/ Markets / Mark To Market/  Tata Steel bounces back in Q2 with Street raising optimism on growth
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Tata Steel bounces back in Q2 with Street raising optimism on growth

Tata Steel’s consolidated operations have seen a good improvement with revenues climbing 7% y-o-y

Photo: ReutersPremium
Photo: Reuters

Tata Steel’s Q2 numbers came in ahead of the Street’s estimates with the company seeing one of the highest steel delivery volumes in many quarters. The firm is also looking at an asset sale of its Netherlands unit. That’s further expected to lower debt and improve cash flows as European units have huge fixed cash expenses. Little surprise, the Tata Steel stock has been recovering with its price just about 3% shy of pre-covid highs.

Tata Steel’s consolidated operations have seen a good improvement with revenues climbing 7% year-on-year (y-o-y). Demand for steel is showing a steady improvement as well. India sales volumes were 22% higher y-o-y. Some of it is pent-up demand, but demand from auto and construction has been on the rise.

Tata Steel’s mix of high value-added products is also a good improvement and has resulted in higher realizations. Further, an increase in steel prices by about 35% y-o-y has also aided revenue growth. As a result, realizations in the India operations increased by 14% y-o-y.

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Solid metrics

Both improved realizations and better volumes resulted in a huge boost in operating metrics. Consolidated Ebitda increased 60% y-o-y. Further, European operations also showed decent improvement. Besides, spreads are expected to improve in the second half and could reflect in higher profitability. Ebitda is earnings before interest, taxes, depreciation and amortization.

Besides, Tata Steel’s Netherlands asset sale is going to boost operating profitability further and aid in paring total debt. Due to high fixed costs, its European operations have been a squeeze on the good domestic market show. The asset sale is likely to go through in the next 2-3 quarters.

“Any restructuring or stake sale in Europe is likely to drive a re-rating as European operations have huge, fixed cash expenses," said Siddharth Gadekar, analyst at Equirus Securities.

Of course, Tata Steel’s UK operations are still a concern. Analysts said the unit continues to incur high cash burn. The management said it continues to work on making the business self-sufficient, and is in dialogue with the UK government.

Nevertheless, the reorganization of its Indian subsidiaries is a step in the right direction. Tata Steel is merging its long product subsidiary into Tata Steel Long Products. Besides, the firm is also re-organizing its business into four verticals to drive scale and synergy benefits.

Still, the pickup in the steel business is also seeing analysts upgrade earnings expectations for the coming years. Besides, the benefits of the restructuring will be seen in the long run.

“Bhushan Steel merger consequent tax synergies are yet to play out and pose upside risk to estimates," said analysts at Investec Capital Services in a client note.

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Published: 15 Nov 2020, 09:05 PM IST
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