Tata Steel’s Ail­ing Euro­pean Unit in Re­cov­ery Mode

Re­cast, de­mand pickup help unit to re­main op­er­a­tionally pos­i­tive for 4 qtrs

The Economic Times - - Companies - MEGHA MANDAVIA

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.

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