Tata Steel’s lower June quarter sales may be offset by better realisation

Tata Steel Ltd's domestic production and steel sales volume declined sequentially during the June quarter, as anticipated. Provisional sales volumes at 4.15 million tonnes (MT) were down 11% sequentially as demand weakened across most sectors. The company attributed this to partial lockdowns in some states and temporary shutdowns in a few steel-consuming sectors amid the second wave of the covid-19 pandemic.

To offset the impact, exports were increased to 16% of the total sales versus 11% in 4QFY21, said the company. Exports stood at 0.66 MT, up 33% sequentially, and domestic sales were at 3.49 MT, down 16% sequentially.

Analysts at Motilal Oswal Financial Services highlighted that volume offtake in key business verticals such as auto was down 28% sequentially, though up 7 times on a year-on-year basis. Branded and retail sales were down 18% sequentially, but 112% higher YoY. Industrial products and projects also saw an 11% sequential decline, though sales doubled from those seen in the year-ago quarter.

Tata Steel BSL's sales decline was lower compared to Tata Steel, down 6% QoQ, at 1.12 MT. Analysts believe higher exports offset the decline in domestic volumes.

Sales in Tata Steel Europe fell 4.5% sequentially to 2.36 MT. Production improved 2.6% sequentially to 2.73 MT.

However, the good news is that the domestic market has been improving since mid-June with easing lockdowns. Analysts expect a sharp recovery in demand moving forward. Even though sales may have been soft, better realisations are set to drive the company’s profitability further during the June quarter.

Domestic hot-rolled coil (HRC) prices were up 20% sequentially after price hikes in the first fortnight of June. The company is an integrated manufacturer with captive supplies of coal and iron ore. The volatility in basic raw material prices of iron-ore thereby does not impact the company.

Further, analysts' are viewing the company’s higher exposure to flat products, used in the manufacturing of automobiles, white goods etc in positive light.

“Given the highest exposure to high-priced flat products (flats/longs of 80/20), full iron ore integration, and improved profits from European operations, we expect TATA’s EBITDA to grow 95% in FY22 to ₹59600,” said analysts at Centrum Stock Broking Ltd.

Tata Steel Europe's performance is seen improving further. During the quarter its production grew 27%YoY to 2.73 MT and steel deliveries increased by 19%YoY.

"While Tata Steel Europe’s (TSE) Ebitda per tonne improved in Q4 to $66 a tonne, we expect Ebitda per tonne to cross $100 a tonne in H1FY22 given the sharply elevated spreads,” analysts at JPMorgan Asia Pacific Equity Research wrote in a June report. Ebitda is earnings before interest, tax, depreciation and amortization.

The stock rose as much as 1.24% in morning trades on Monday.