Favourable cycle should keep Tata Steel stock in demand
Barring a serious 3rd wave of Covid, domestic and global demand outlook remains good
Steel major Tata Steel (TSL) delivered results that beat consensus expectations, but the share price reacted intra-session to the news. This may have been due to profit-booking because the share had risen by 7 per cent in the past three sessions. After a volatile session, the stock closed with a 2.2 per cent rise on the NSE.
In the first quarter (Q1FY22), net profits, revenue, and operating profits all rose sequentially over Q4FY21 and year-on-year (YOY) over Q1FY21 (YOY). The YOY performance was, of course, driven by a low base but sequential improvement was positive despite being hit by the second wave, which led to reduced steel consumption.
Commodity markets remain bullish and demand for the company’s products remains high. However, TSL had to contend with rising raw material costs including both higher iron ore and higher fuel costs. It was also forced to divert oxygen production for medical purposes.
China’s policymakers have cut back on steel production, which has helped TSL. Exports rose as a result. In general, global demand is expected to rise by 5-6 per cent and EU demand by 11 per cent or more.
At a consolidated level, TSL reported operating revenues of ~53,372 crore, higher than ~25,475 crore last year and ~49,977 crore in Q4. Note that production and delivery declined sequentially but higher prices compensated. The Ebitda of ~16,185 crore was a record, versus ~630 crore (YOY) and ~14,290 crore (Q4). The Ebitda margin was 30.3 per cent.
The profit after tax (PAT) was ~9,768 crore, versus ~4,648 crore loss last year and ~7,162 crore profit in Q4. The free cash flow was ~3,553 crore, and the company could deleverage by paying down ~5,894 crore of debt. Net debt was ~73,973 crore in June versus net debt of ~75,389 crore in March. Deleveraging could have been higher, except for a working capital build-up.
Exceptional items (mainly on account of Covid-19 protection for employees) reported a loss of ~183 crore, versus gain of ~58 crore last year and loss of ~991 crore in Q4. Inventories rose to ~3,292 crore due to lower deliveries and higher value of inventory held. Finance costs were held at ~1,811 crore, versus ~2,006 crore last year and ~1,866 crore in Q4. The Ebitda per tonne jumped to ~22,779 versus ~18,253 in Q4. TSL Europe didn’t fare as well as India, but still registered Ebitda of ~1,533 crore, versus a loss of ~626 crore last year and profit of ~1,194 crore in Q4. Europe had an Ebitda per tonne of ~6,590 versus ~4,841 QOQ.
The cycle remains favourable for steel makers and there should be a pickup in India demand, if the third wave is not serious and the disruptions of Q1 don’t recur. The Budget’s infrastructure focus should create more demand. Europe demand remains strong as global economic activity continues to pick up. Most analysts remain bullish on the stock.