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Shares of Tata Steel were up in early trade on Tuesday. (Bloomberg)
Shares of Tata Steel were up in early trade on Tuesday. (Bloomberg)

Tata Steel Q4 nudges ahead of the Street; demand pickup is critical

  • Tata Steel’s Q4 numbers were a step ahead of the Street’s estimates on its operations
  • Domestic demand from construction, auto sectors is tepid. This may hit near-term performance

Tata Steel Ltd’s Q4 operations improved, thanks to better-than-expected performance of its European operations and domestic long products business. The upbeat results shone a light on the stock’s performance on Tuesday, gaining 1.8%.

But FY21 will be challenging, as demand is soft while production is only just beginning to be ramped up.

While sales declined about 13.6% year-on-year (y-o-y), volume growth exceeded Street estimates. Overall, revenue in the March quarter fell about 20% y-o-y, but was slightly ahead of Street forecasts.

Lower costs and better operational performance at its European and domestic steel operations, however, led to a decent Ebitda, or earnings before, interest, taxes, depreciation and amortization.

Its overall Ebidta per ton improved considerably over Q3, but was lower than the year-ago quarter. The on-quarter improvement in Q4 realizations added some tailwinds to the performance, which is good.

But the coming months will be challenging because of the slowdown in the Indian economy, even as Tata Steel is ramping up its capacities. The management said that capacity utilisation is steadily improving. The company is operating at about 70-80% capacity, and will reach full capacity in July. Demand from the domestic automobile and construction sectors remain tepid, and is likely to increase only in the second half. One positive is that the company has trimmed capital expenditure plans for this fiscal year by about half. This will reduce stress on cash flows.

Exports have lent a cushion during these times.

During the lockdown, exports of steel products increased as demand from overseas has been steady, particularly from China.

However, higher operational costs for the steel industry could keep the performance subdued in the coming year. Another worry is the rising levels of net debt, which according to analysts has increased by about 10% to over 1 trillion in FY20.

While servicing the debt would not be an issue, the increase in debt levels would lower cash flows. As such, the company has already seen reduced free cash-flow during FY20 compared to FY19.

Yet another concern is the firm’s European operations, where the costs of operations are quite high. “While the Street might cheer a positive Tata Steel Europe (TSE) Ebitda, we highlight the sustainability of TSE operations is a key concern, with fixed costs in excess of $950 million," said analysts at Investec Securities Ltd in a note to clients.

Analysts have cut FY21 earnings considerably due to the slowdown. The stock tumbled in the covid-19 sell-off, but has since recovered from its March lows. But the slowdown could weigh on the stock’s performance.

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