Tata Steel’s Ailing European Unit in Recovery Mode
Recast, demand pickup help unit to remain operationally positive for 4 qtrs
Tata Steel Europe (TSE), which has been a drag on the Indian steelmaker since recession hit the continent five years ago, is finally stabilising. Several restructuring measures and a recent pickup in demand have helped the ailing unit remain operationally positive for four straight quarters now.
The company is expected to be operationally positive too for the quarter ended March 31 on the back of higher volume. TSE, known as Corus before the buyout in 2007, accounts for more than half of Tata Steel's total consolidated revenue. Tata Steel will report Q4 results on Wednesday.
“We believe that TSE is likely to benefit from a cyclical upturn in demand, focus on reducing cost, restructuring and stable capex intensity,” said Sanjay Jain, a metals analyst with Motilal Oswal. “We reiterate that TSE has huge potential of improving its cost structure as nearly 1/3rd of its total human resources are engaged in distribution and building business, which is exceptionally high from industry standards.”
TSE undertook several costcutting measures, including job cuts, plant modernisation, asset sales and temporary plant shutdowns, to reduce losses.
Earnings before interest, depreciation, tax and amortization (EBITDA) per tonne is expected to be $35-38/tonne for FY14 from $10/tonne a year earlier. A recent rise in manufacturing demand in Europe is likely to drive volumes further up, while a fall in iron-ore and coking coal prices will prop up margins.
“We reiterate that TSE will gain on improving steel demand outlook in Europe,” wrote Kawaljeet Saluja, an analyst with Kotak Institutional Equity. The world’s largest steelmaker ArcelorMittal last week said that the prospects for growth in Europe and the US were encouraging and they would remain cautiously optimistic about the business outlook for the rest of 2014.
Analysts said it has become easier to predict EBITDA at TSE. Earlier earnings used to be volatile and unpredictable. The turnaround that’s taking shape in Europe has benefited the consolidated operations of parent firm Tata Steel.
Analysts, on an average, are expecting Tata Steel to report consolidated net profit of .` 970.9 crore on sales of .` 40,791.9 crore, according to a poll conducted by Bloomberg. The company reported a loss of .` 6,529 crore during the same period last year, hit by impairment charges.
Even though the analysts are lauding the improvement in the Europe business, they expect further push to be greatly dependent on a significant and sustained growth in European economy. “No doubt there has been some recovery, but whether it will sustain or collapse, time will tell,” said analyst Goutam Chakraborty with Emkay. “From $35-45 EBITDA/tonne level onwards, it may not be easy to improve further unless underlying demand improves. Steel prices have to go up backed by demand.”
He said that improvement in EBITDA has mainly happened due to cost-cutting measures and better operating efficiency, but going forward the scope of improvement in this parameter seems to be limited. TSE is posting net losses for five years now.
Giriraj Daga, an analyst with Nirmal Bang said TSE needs at least $80-90/tonne EBITDA to turn profitable on net basis. “Investment demand has to go up. What we are seeing is all pent-up demand. This year demand will go up and may continue for a year or two. But after that, what?"
There are plenty of reasons for caution. Overcapacity still persists in Europe and the demandsupply gap will need some more time to balance itself.