Home / Markets / Mark To Market /  Tata Steel had a weak March quarter, and the rest of the year may be worse

Tata Steel Ltd reported a 14.6% fall in March quarter (Q4) sales, but this did not come as a surprise for investors. In fact, the company’s shares have risen about 2% since it reported the sales data.

With covid-19 stalling construction and manufacturing activity, investors have been bracing for the worst. In fact, the stock has nearly halved year till date.

Low sales will weigh on Tata Steel’s earnings in Q4, although it’s not clear how big the hit will be.

January-June is a seasonally strong period for the steel industry, when construction projects are in full swing ahead of the monsoon, and customers in the manufacturing sector plan their purchases for the calendar year.

Trouble ahead.
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Trouble ahead.

Industry data shows there was a sequential improvement in business activity in January and February. However, the momentum was abruptly disrupted by covid-19.

With the lockdown extended till 3 May, the steel industry may lose a large part of the peak demand season. Normalization of disrupted supply chains and return of migrant workers to manufacturing and construction zones will take at least one month after the lockdown is lifted. And, by June, the monsoon will set in. “Only after the monsoon ends and the workers return to the cities and construction sites can we expect any reasonable pick up in construction activities," said Indian Steel Association.

That can suppress offtake from the construction sector for more than three months, with the June quarter being hit the most. Deceleration in economic activity and fall in consumer income can reduce demand for automobiles and manufacturing sectors. Crisil Ltd projects a 14-17% fall in steel demand for FY21. “While demand would contract in the second quarter as well, pent-up demand release, especially in construction and infrastructure, would aid growth in the second half," it said in a note.

Therefore, June and September quarters can be worse for Tata Steel.

Sales in Q4 was notably lower than output, implying rising inventories. With markets shut, inventories are set to rise further. Low steel spreads (difference between raw material cost and selling price) itself will erode Indian steel manufacturers’ profitability by four percentage points sequentially in Q1 FY21, said Icra Ltd. Add to this the cost overheads arising due to underutilization of plants, and the impact on profitability will be higher.

“We see performance worsening in H1FY20 led by demand dip in domestic market; lower exports realisation and sustained weakness in domestic prices owing to destocking. Furthermore, we expect Tata Steel Europe to make loss at the operating level in FY21," said Edelweiss Securities Ltd analysts in a note.

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