Tata Steel: Riding India's infra wave, facing global commodity downturn
Summary
- The next three fiscal years will be challenging as the company undertakes the restructuring of its UK operations
India's infrastructure surge has driven demand for steel, benefiting Tata Steel significantly. But global demand for the metal alloy remains tepid, and the company's European operations are suffering losses. Robust performance in India during the fiscal third quarter of 2024 (Q3FY24) has helped Tata Steel sustain its loss-making European operations. Looking ahead, an uptick in the global commodity cycle would be advantageous, especially as Tata Steel faces the substantial task of overhauling its Port Talbot facility in the UK.
This UK facility is transitioning from old blast furnaces to low-carbon emitting electric-arc-furnaces, a move that entails significant costs and complex negotiations with unions to reach settlements for impacted workers. The current furnaces, set to be decommissioned after September 2025, are nearing the end of their lifespan, resulting in reduced production. Even if all goes according to the script, Tata Steel's UK operations won't be fully functional until FY27, leading to financial strains.
In contrast, the company's blast furnace 6 (BF6) in the Netherlands is nearing the end of its maintenance and should resume operations soon. Net-net, Europe production can gain in volume at least for the nine months before the UK shutdown. However, Tata Steel anticipates a potential drop in average selling prices in the European Union (EU), which may limit their ability to capitalize on any increase in UK prices.
Globally, soft demand and rising Chinese exports are holding down prices. China, holding over 50% of the global production capacity, exported 7-8 million tonnes monthly in Q3FY24.
Increased exports from China could further lower global prices. A key factor is successive stimulus packages in China. If those are effective, China’s internal demand will absorb a higher share of steel production, reducing exports.
For Q3FY24, Tata Steel’s standalone revenue rose 2% year-on-year to ₹34,700 crore, in line with consensus estimates. Despite a drop in standalone average selling price to ₹71,069 per tonne, earnings before interest, taxes, depreciation, and amortization (Ebitda) soared 61% year-on-year to ₹8,200 crore, and Ebitda per tonne improved significantly due to reduced raw material costs.
Adjusted net profit surged 96% on year to ₹4,600 crore, well above estimates. The company posted its best-ever Q3 sales at 4.9 million tonnes, an increase of 6% year-on-year. Domestic crude steel production, including Indian subsidiaries, was also up 6% on year at 5.3 million tonnes.
Consolidated revenue, however, dipped 3% year-on-year to ₹55,300 crore, attributed to lower blended average selling prices globally and domestically, which stood at ₹77,359 per tonne, down ₹2,478/tonne from a year ago.
Consolidated Ebitda jumped 55 % on year at ₹6,300 crore, solely on India performance, since Europe reported an Ebitda loss of ₹2,900 crore.
The company has managed to pay down debt despite the stress. Gross debt declined sequentially to ₹88,200 crore from ₹89,700 crore in Q2FY24, and net debt stood at ₹77,400 crore with cash liquidity at ₹23,300 crore. Net debt-to-Ebitda ratios came in at 3.23 times; the net debt-to-equity stood at 0.78 times in Q3FY24. Consolidated cash flow was lower at ₹7,879 crore.
The company anticipates a $10/tonne increase in coking coal costs and a potential ₹1,000/tonne decrease in India realizations for Q4FY24. Average selling price for the Netherlands is also expected to be lower by an equivalent of £14/tonne but UK average selling prices may increase by an equivalent of £40/tonne in Q4FY24.
The Netherlands production will rise by end of January 2024 as the BF6 restarts. The Kaliganganagar facility in Odisha will add 0.7 million tonnes of volumes in FY25, and run at full capacity of 5 million tonne per annum (MTPA) in FY26.
The management sees higher EU realizations and volumes as BF6 comes on stream and Kaliganganagar will add to India capacity. The eventual target is 40 MTPA capacity and Tata Steel also hopes to be carbon neutral by around 2045.
That’s a long term target. However, the next three fiscal years will be challenging as the company undertakes the restructuring of its UK operations. A boost in the global economic cycle could significantly ease this transition period.
