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Business News/ Markets / Mark To Market/  Tata Steel’s deleveraging accelerates; operating performance strong in Q3
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Tata Steel’s deleveraging accelerates; operating performance strong in Q3

Fall in exports and low opening stock at the start of Q3 key reasons for sequential  fall  in  sale
  • Ebitda loss also widened on the back of reversal of wage support and higher carbon provisions
  • A Tata Steel sign is seen outside their plant in Scunthorpe northern England, October 15, 2014. REUTERS/Phil Noble/Files (REUTERS)Premium
    A Tata Steel sign is seen outside their plant in Scunthorpe northern England, October 15, 2014. REUTERS/Phil Noble/Files (REUTERS)

    Tata Steel Ltd’s December quarter (Q3) earnings have many positives. Consolidated earnings before interest, tax, depreciation and amortization (Ebitda) was at a record high, aided by favourable demand and pricing environment. Additionally, debt reduction with improved cash flows is helpful.

    In Q3, consolidated Ebitda grew 2.6 times year-on-year and also improved 1.53 times over Q2. This was despite higher operating losses in European operations and a decline in domestic volumes sequentially. Higher steel realizations and integrated domestic operations accrued benefits as product mix improved. Reduced exports and lower opening inventory at the start of Q3 were key reasons for the sequential sales decline. However, exports earn lower margins and, hence, high domestic sales bode well. A higher proportion of auto sheet sale in the overall mix also helped.

    Catching pace
    View Full Image
    Catching pace

    Note that despite a steep rise in key raw material iron-ore prices, Tata Steel beat peers with an Ebitda per tonne of 20,175 at the standalone level. This was up 53.6% sequentially and significantly higher compared to 11,059 seen in Q3FY20. In comparison, this measure for peers, JSW Steel Ltd and SAIL, stood at 14,444 and 7,722, respectively. On the other hand, Jindal Steel and Power Ltd, which is benefiting from operating leverages post expansion of capacities and captive Sarda mine iron-ore inventory, had reported a relatively higher Ebitda per tonne of 20,800.

    To be sure, the European operations remain a weak link and Tata Steel Europe saw its Ebitda loss widening to 724 crore from 462 crore in Q2. This, however, was also on the back of reversal of wage support and higher provisions for carbon emissions. The same can rebound to a positive zone in Q4 with European steel prices having improved. The Street, disappointed with the talks on Netherlands plant sale getting stalled, will be keenly watching for a turnaround in European profitability and any other progress on restructuring efforts.

    Even so, Tata Steel impresses on deleveraging efforts as consolidated net debt reduced by 10,325 crore to 86,170 crore. Plans to reduce gross debt by 12,000 crore in Q4 will help in reducing its net debt further.

    Meanwhile, domestic operations are expected to continue to see strong margin improvement. “Given the lagged impact of steel price hikes, and likely interim auto contract resets higher, we expect 4Q to be even stronger versus 3Q," said analysts at JP Morgan Asia Pacific Research.

    They have also increased their FY21 earnings estimates by 63%.

    Investors though will closely follow steel price movement in the country. News reports suggest that the Competition Commission of India is launching a probe against steel companies for forming a cartel to increase prices. This has added to Street’s concerns that already remain elevated looking at weak demand from China

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    ABOUT THE AUTHOR
    Ujjval Jauhari
    Ujjval Jauhari is a deputy editor at Mint, with over a decade of experience in newspapers and digital news platforms. He is skilled in storytelling, reporting, analysing and writing about stocks, investment ideas, markets, corporates and more. He is based in New Delhi.
    Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Check all the latest action on Budget 2024 here. Download The Mint News App to get Daily Market Updates.
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    Published: 10 Feb 2021, 12:46 PM IST
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