Tata Steel Ltd’s third-quarter (Q3) numbers were unimpressive across major segments and have given investors something new to worry about. The prospect of weak sales and lower realizations dragged the stock down nearly 6% on Monday.

Revenue declined 9% year-on-year in Q3 on weak steel demand. Its European operations particularly saw a slump in demand from auto firms, which account for about 40% of sales volume. Besides, hot-rolled coil prices have also come off. Additionally, Tata Steel said spreads during Q3 dropped from €280 per tonne to €180 per tonne, which led to an Ebitda (earnings before interest, taxes, depreciation, and amortization) loss in Europe.

Ebitda loss of $54 per tonne during Q3 in its European operations was sharply higher than analysts’ estimates of about $24 per tonne.

The domestic operations too were off colour. The India revenue dipped about 11% year-on-year in Q3. While the domestic operations remained Ebitda positive, operating metrics took a hit due to rising expenses. Ebitda margins for India contracted by 174 basis points year-on-year to 24.8% in Q3.

Graphic by Satish Kumar/Mint
Graphic by Satish Kumar/Mint

Analysts, though, had penciled in a soft quarter so the numbers were more or less in line with expectations, but weak demand weighed on the company.

Tata Steel has pushed back the expansion of its Kalinganagar plant in Odisha due to slower demand growth. The company also renegotiated some of its automotive steel contracts at lower prices in Europe, which could keep its European operations under pressure. For investors, another worry is the tougher environment rules that could take a further toll on volume.

“With automotive prices slashed by around 6,000 per tonne in Europe and a tougher carbon regime, there could be a sustained downturn in the steel business over the next few quarters unless the European Commission comes up with stringent Border Adjustment Tax (BAT) or enhanced support for R&D to help reduce CO2 emissions further," said Emkay Global Financial Services in a note to clients.

Nevertheless, the soft steel cycle has meant that the company will not be able to meet its deleveraging plans of reducing debt by $1 billion this year.

In fact, Tata Steel’s net debt shot up to more than 1 trillion after the acquisition of Bhushan Steel Ltd and Usha Martin Ltd. Its high debt levels will continue to be an overhang on the stock.

Steel prices have turned soft lately due to the coronavirus epidemic in China. However, production cuts are expected to arrest any big decline in steel prices.

The Tata Steel management also expects domestic steel prices to rise. Also, operations at Bhushan Steel are turning positive.

Overall, India will make a bigger contribution to the results going forward. Much depends on how demand shapes up, which is not showing signs of a sustained improvement yet.

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