Tata Steel: Realization gains need to follow impressive sales in Q31 min read . Updated: 14 Jan 2020, 12:08 AM IST
- Price hikes, along with benign raw material costs, should help drive a sequential improvement in realizations in Q4
- The Tata Steel stock has been on the recovery path and has gained 52% from its 52-week low in October 2019 as steel prices began rising by the end of 2019.
Tata Steel Ltd withstood the economic slowdown fairly well, reporting a 17% sequential growth in India sales volumes in the December quarter (Q3). Sales have risen by 24% from a year ago, according to provisional numbers released by the company.
Branded and industrial products, and retail and project segments saw sequential improvement in sales, said Tata Steel.
The volumes are driven by restocking at dealers, said analysts at Edelweiss Securities Ltd. “Tata Steel’s Q3FY20 sales volume was slightly ahead of our estimates. In our view, standalone operations volume drove the outperformance," analysts at the brokerage firm said in a note.
The Tata Steel stock has been on the recovery path and has gained 52% from its 52-week low in October 2019 as steel prices began rising by the end of 2019.
However, a precipitous fall in steel prices from April to October 2019 means that realizations for Tata Steel and the sector as a whole are expected to be weak in the December quarter, impacting earnings.
Average steel prices in India were down by ₹2,400 per tonne sequentially last quarter, according to Emkay Global Financial Services Ltd. Tata Steel’s profitability is, thus, expected to take a hit in the December quarter.
“Despite an impressive volume uptick, we expect Q3FY20 margins to slide due to weaker realisations," said analysts at Edelweiss.
The company’s performance in Europe also remains unexciting. Sales in the region increased just 1%sequentially and dropped 1.7% from the year-ago quarter.
That said, the new year began on a positive note for steel companies. Domestic producers hiked prices this month, tracking a rise in global steel prices. As key customers get into restocking mode and dry weather gives impetus to construction activity, many see a seasonal increase in demand for steel.
The price hikes, coupled with benign raw material costs, should help drive a sequential improvement in realizations in the current quarter (Q4 FY20).
The moot question is how strong or sustainable the recovery is going to be. “We believe most of the demand optimism is coming from construction demand (from the infrastructure segment) given the peak season, as auto and capital goods have not shown any visible signs of revival," analysts at SBICAP Securities Ltd said in a note.