What's driving Tata Steel post Q3 loss, bearish analysts

Moneycontrol Bureau

After disappointing December quarter earnings, shares of Tata Steel opened 3 percent lower and soon attracted buyers in early trade itself. The stock hit intraday low at Rs 215 per share (down 5 percent) but then hit intraday high of Rs 231 per share (up 2 percent) on Friday.

Tata Steel posted steep third quarter loss hurt by weak demand, China imports and currency headwinds. It reported a consolidated net loss of Rs 2127.23 crore and income declined by 17 percent to Rs 28039 crore (year-on-year) in Q3FY16. During the period, its total expenses also more than doubled to Rs 1224.90 crore from Rs 578 crore.

What could be driving the stock now?

The government is likely to finally announce the minimum import prices (MIP) on certain steel products. According to CNBC-TV18 sources, the government could levy USD 360 per tonne on semi-finished slabs and USD 450 per tonne on hot rolled steel products. The government could also put MIP of USD 500-550 per tonne on cold rolled products and USD 660 per tonne on coated flat steel products.

The government has been considering MIP in order to protect domestic steel manufacturers from cheap imports from China. Imports from China, Japan and Korea have seen 29.2 percent growth till December FY16. In FY15, imports had increased by 75.5 percent. Domestic steel makers complain that there is dumping of steel into the country by China, Japan and Korea.

Steel prices have dropped further by Rs 1000-1500 in Jan compared to Q3, so unless government introduces MIP, there is a good chance that Tata Steel will miss its FY16, says Macquarie.

Meanwhile, China has also decided to cut its steel capacity by a whopping 100-150 million tonnes over 5 years.

So, should you buy or sell Tata Steel now? Not really!

Credit Suisse maintains an underperform rating with a target price of Rs 180 per share. It expects continued weakness at the European operations as it mothballs existing downstream facilities and realigns production while incurring related fixed costs for a few more quarters. The brokerage warns that Tata Steel may post loss in Q4 and hence cut FY17/18 EBITDA/t estimates from USD 33/39 to USD 20/ USD 31, while keeping estimates for Indian operations largely unchanged. As a result, its FY17 earnings per share (EPS) goes further below zero and FY18 EPS gets cut by 5 percent.

Macquarie also retains underperform with a 12-month price target of Rs 203 per share. "Apart from a minor improvement in the steel price, hopes of recovery hinge on government action on tariff barriers and a sell down of loss making assets. Fundamentals remain weak, and there is a low probability of predicting the certainty of the events playing out," it says in a report.

CLSA continues to have a sell rating with a target price of Rs 170 per share. It thinks MIP and Tata Steel's successful completion with Greybull Capital for sale of Corus’s long products business only can bring strength to the company. The brokerage forecasts losses over FY16-18 and believes that major protectionist measures in India/Europe are needed to bring the company back to profits, on which visibility is low.

At 13:36 hrs Tata Steel was quoting at Rs 228.85, up Rs 2.70, or 1.19 percent on the BSE.

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