Tata Steel may turn a corner after subsidiary shows recovery on track2 min read . Updated: 15 Oct 2020, 09:42 PM IST
Tata Steel BSL’s rebound has been quick with volume growth coming in at 23% year-on-year
The steel sector is building up a case for a turnaround after a dull first quarter. Tata Steel could rack up profits in Q2 after covid-19 disruptions, showing that the bounce-back has been swift indeed. The decent jump in volumes in Tata Steel BSL Ltd led it to post a sharp recovery in the September quarter and return to profitability. The sharp recovery is helping the Tata Steel stock, which gained 2.4% in October, though it is still down 26% from the pre-covid highs.
Tata Steel BSL’s rebound has been quick with volume growth coming in at 23% year-on-year (y-o-y). The recovery in steel prices is also encouraging with average selling prices improving 13% sequentially. Both, the bump up in volumes and the increase in average selling prices have resulted in an improvement in BSL’s profitability.
Lower iron ore prices and cost cuts have also bolstered operating metrics. BSL’s operating profits are at an eight-quarter high.
The company notched up an Ebitda per tonne of about ₹8,600, a jump of 72% over the year-ago quarter, noted analysts.
International demand had supported the steel sector earlier during the covid-19 pandemic. Now the sector is seeing recovery in domestic demand. That is also expected to reflect in Tata Steel’s sales performance, with the steel major’s domestic volumes shooting up about 22% y-o-y in Q2.
Shipments to auto firms have improved by about 10% and market share gains seem to be on the cards.
Yearly growth might also be looking up with demand improving. “The recovery in global and Indian steel demand and prices, along with production normalization, should drive sequentially better volumes and margins for Tata Steel," said Jefferies India in a client note.
The effects of lower iron ore costs and cost savings should also be evident in Tata Steel’s Q2 performance. “A domestic price uptick sequentially is likely to increase domestic Ebitda per tonne by two times to ₹11,900 per tonne in Q2FY21," said analysts at Edelweiss Securities in a client note.
Tata Steel has cut its capital expenditure and the implementation of deleveraging plans may support valuations. “A focus on deleveraging ahead of India capacity expansion is prudent given a stretched balance sheet," noted Jefferies.
All of this could see Tata Steel return to profitability in Q2 in line with street expectations. Of course, the stock price seems to be reflecting much of the recovery. This is good, but the recovery could still be tested once the pent-up demand after re-opening begins to normalize.