What lies ahead for Tata Steel?
European operations and volume support from Kaliganagar plant may help Tata Steel start FY18 on a positive note.
Jitendra Kumar Gupta
A combination of improvement in profitability in its European operations and strong demand growth in the domestic market helped Tata Steel report a strong turnaround in its businesses.
As against a consolidated loss (pre-exceptional items) of Rs 453 crore last year in March quarter, the company made a (pre-exceptional items) net profit of Rs 3352 crore. Similarly, on an annual basis, it made a consolidated profit of Rs 4020 crore compared to a loss of Rs 1948 crore.
In FY17, the group’s annual sales volume grew by 1.44 percent to 23.88 million tonnes with March quarter registering a 7.5 percent year-on-year growth. India has contributed a lot to this growth with the pick-up in domestic demand and increased production at Kalinganagar plant, which has recently seen a ramp-up in hot metal production to 2.23 million tonnes and 1.61 million tonnes of hot-rolled coils.
That apart, the company has been exporting where the realisations are better by about Rs 3000-4000 a tonne. Thanks to the recovery in steel prices, in fact, the realisations have improved across its operations in India, Europe and other markets.
For instance, in March quarter, Indian operations reported an average realisation of Rs 53,300 per tonne, which is a growth of 23.5 percent compared to the corresponding quarter last year. Indian operations, which account for 48 percent of the group revenue, posted a good show with growth in volumes and realisation leading to higher margins and profits. To put it in perspective, Indian operations made an EBITDA per tonne of Rs 7132, which is a growth of 111 percent compared to last year.
European operations, which account for 43 percent of revenue, made a great contribution to profitability as a result of restructuring of operations. In 2016, European steel demand grew at 0.5 percent as against 6.1 percent growth in domestic market. This difference in performance will continue at least for some more time, but the good news is that the European operations are gradually losing less money.
Despite a 9.5 percent decline in annual sales in FY17, Europe reported a Rs 4705 crore EBITDA as against an EBITDA loss of Rs 513 crore in FY16. This was possible as a result of restructuring in European operations which included a sale of long products and the speciality steel plant, which were incurring losses. That apart, stability in currency, partial recovery in European steel prices and restriction on cheap steel imports in the UK helped European operation.
Europe will continue to show better results as part of the impact of those loss-making steel plants is yet to be seen fully in the profitability of the European operations. India will continue to pull its weight in terms of the volumes largely driven by higher domestic demand and a ramp-up of production at Kalinganagar plant.
The company during its analyst call on Tuesday guided for a volume of 12.3-12.4 million tonnes in FY18 for the domestic operations as against 10.97 million volumes in FY17. Even if the volume growth remains flat in other markets like Europe, Tata Steel will be logging volumes of close to 26.5 million tonnes in FY18, which is a volume growth of almost 10.5.
Further, taking Q4FY17 consolidated realisations into account Tata Steel could post a revenue growth of about 14-16 percent in FY18. Moreover, the growth in earnings will be higher because of the expansion in margins both on account of its operating leverage and absence of loss-making facilities next year.Thus, expecting a 15-16 percent growth in earnings or an EPS of about Rs 42 this fiscal is quite possible. Meanwhile, its stock has already reacted to numbers and seen a spike. At Rs 479 stock is up 4 percent and currently trading at price-to-earnings multiple of close to 12 times, leaving very little scope for upside in the near-term.