Tata Steel’s net profit climbed 6% year-on-year, thanks to a sharp write-back in tax provisions of about  ₹4233 crore in total (Bloomberg file)
Tata Steel’s net profit climbed 6% year-on-year, thanks to a sharp write-back in tax provisions of about 4233 crore in total (Bloomberg file)

Tata Steel’s Q2 numbers show recovery in the steel market is not coming easy

  • While tax write-backs aided net profit, operating performance reflects muted demand conditions
  • Quarter-on-quarter, revenues have dipped 3.8%. In fact, this is the second straight quarter of lower revenue for the company

It’s been a challenging quarter for Tata Steel Ltd. September quarter profit belied expectations, and a closer look at the numbers shows that economic conditions are bleaker than anticipated. While tax write-backs aided net profit, the operating performance reflects muted demand conditions.

Tata Steel’s second-quarter revenue fell 15.4% year-on-year. Weak steel demand, particularly from the automobile sector, hit revenues. Even quarter-on-quarter revenues dipped 3.8%. In fact, this is the second straight quarter of lower revenue for the company.

Graphic by Paras Jain/Mint
Graphic by Paras Jain/Mint

Besides, its Ebitda (earnings before interest, tax, depreciation and amortization) fell a steep 56% from the year-ago quarter. Higher costs have been a burden on its operating parameters. While revenues dipped 15%, operating expenses were down only about 3.6%. As a result, the Ebitda margin slid from 21.7% in the year-earlier to 11.3% in the September quarter.

Given that the steel market recovery looks slow, Tata Steel has scaled back its capital expenditure plans. Initially, it had settled on 12,000 crore capital expenditure, but has now reduced this to 8,300 crore, reflecting the greater stress in the steel world.

Tata Steel’s net profit climbed 6% year-on-year, thanks to a sharp write-back in tax provisions of about 4,233 crore. It wrote back a significant portion of deferred taxes, even as it made a significantly lower tax provision for the quarter. In FY19, the effective tax rate for its stand-alone operations was 35%. Analysts said gains from the recent cut in corporate tax could be substantial for the company.

A positive is that iron ore prices are now lower, while domestic steel prices are showing signs of stability. The government’s revival package for low-cost housing could improve conditions in the long-steel products market. Tata Steel, despite the challenging environment, has kept its domestic production at levels similar to those of the first quarter, at about 4.5 million tonnes. Another factor to watch out for is the China-US interim trade deal, the signing of which was deferred to December.

The nearly 31% fall in its stock price in the past one year may mean the negatives have been priced in, but a recovery in the shares will depend on a revival in domestic demand. Some of that will have to come from the auto sector, which remains in the grips of a slowdown. “We maintain our underperform rating as a) optimism around India margin expansion appears overdone; b) Tata Steel Europe margins should stay under pressure; c) net debt should stay elevated; d) we expect consensus Ebitda estimates to be downgraded," said analysts at Jefferies India Pvt. Ltd in a note to clients.

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