Worst may be over for Tata Steel after Q3 hit

Overall, Tata Steel’s Ebitda in Q3 at ₹4,050 crore, a whopping 75% lower year-on-year.

Small wonder, the stock was the biggest loser on Tuesday among the Nifty 50 companies, falling by 5%. The problem also is that expectations from the ongoing March quarter are not high. Tata Steel’s management expects steel price realization in Europe in Q4 to be lower sequentially, it said in the earnings call.

The bright spot is that Ebitda (earnings before interest, tax, depreciation and amortization) per tonne is likely to have bottomed out in Q3 when this measure stood at a loss of ₹7,810 (or $95) for Tata Steel Europe. Lower steel price realizations led to lower revenues for the business. While volumes were higher sequentially, they were lower year-on-year. Moreover, costs were elevated and there was a net realizable value loss on steel inventory.

The company expects Tata Steel Europe’s Ebitda per tonne to improve in Q4 on the back of lower costs sequentially. “From margin or Ebitda per tonne point of view, hopefully the worst is behind us as far as Q3 is concerned,” said T.V. Narendran, CEO and managing director, Tata Steel.

However, the extent of recovery remains to be seen given macro headwinds such as volatile energy costs.

In the India business, the management expects steel prices to move higher, helped by increased government spending on infrastructure. In Q3, steel prices were subdued for the most part of the quarter, but the drop in coking coal prices more than offset the realization decline. Coking coal consumption cost was lower by $82 per tonne sequentially.

As such, standalone Ebitda per tonne expanded to ₹11,241, higher by 10.5% sequentially. Still, some analysts reckon that performance was below their expectations and the sequential improvement is underwhelming compared to peers.

To be sure, Q4 is a seasonally strong quarter due to fewer weather-related disruptions for construction activities. Also, the opening of the Chinese economy bodes well for steel prices, given that the country is an important market for metals. “In our view, the key near-term event to focus on would be China’s demand improvement over the coming weeks. Steel prices have increased by 10% and this would flow through to earnings in the March and June quarters,” said a report by JP Morgan on 7 February.

But increasing coking coal prices could offset the rise in steel prices, thus affecting Q4 margin. Tata Steel expects coking coal price to fluctuate between $250 and $350 in the medium term, and not drop below the $250 mark.

Meanwhile, investors would do well to track Tata Steel’s progress on deleveraging. At December end, consolidated net debt stood at ₹71,706 crore, flattish sequentially. While the company would look for opportunities to reduce debt, upcoming capacity expansions may not provide much room. The company has prioritized completion of the Kalinganagar project. It expects to incur capital expenditure (capex) of ₹3,000 crore in Q4. In the nine-month period ended December, capex was ₹9,746 crore.

In the near term, while the Tata Steel stock is likely to be under pressure due to weak Q3 performance, the worst is likely behind. The stock is nearly 6% down in the past one year and almost 20% from its 52-week highs of ₹138.67 seen in April.