Tata Steel sees no dent in brokerage ratings despite poor show in June quarter

Tata Steel Ltd. | CMP Rs 119.25 | Shares of Tata Steel rose over 3 percent on July 25 as the company's better-than-expected earnings for the April-June quarter supported sentiment. The steel manufacturer's consolidated net profit of Tata Steel plummeted 93 percent year-on-year to Rs 525 crore in Q1. This downturn was primarily attributed to the performance of its Europe operations. Comparatively, the company's net profit in the same quarter a year ago was much higher at Rs 7,714 crore, and in the previous quarter (January-March 2023), it stood at Rs 1,566 crore.

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A host of brokerages retained their ratings on Tata Steel Ltd despite weak earnings in June quarter. At 9.36am, the stock was trading at Rs 120.15 on BSE, up 0.7 percent from its previous close.

There was no dent in the ratings by brokerages like CLSA, Ambit Capital, Centrum Broking, Citi, Macquarie, JM Financial and Motilal Oswal Securities.

Tata Steel reported a 95 percent decline in net profit as its Europe operations reported a loss for the third consecutive quarter due to higher coking coal cost, lower realisation and inflationary pressure.

Profit in the quarter was also dented by a non-cash deferred tax charge on account of buy-in transactions at British Steel Pension Scheme. With this, the insurance buy-in of British Steel Pension Scheme has been completed, successfully de-risking Tata Steel UK.

As a result, the potential one-time cost in case of a decision to close the UK operation will be significantly lower, estimated at less than $1 billion. Such a move, if implemented, is expected to positively impact the perception of Tata Steel, potentially leading to a re-rating of the company, analysts said.

"In our view, the completion of insurance buy-in at TSUK derisks the operations significantly and can be a key catalyst and enabler of changes in the UK operations model. While Netherlands operations (within historical profitability range) are expected to get back on track by H2FY24, UK operations might still lag," ICICI Securities said in a note to investors.

The Tata Steel management on a concall indicated that it is engaged in discussions with the British government, particularly as the UK steel-making assets are reaching the end of their useful lives. The management expects clarity in this regard by end of FY24, which might entail additional cost for ushering in structural changes in the UK operations model, analysts said.

The company's consolidated net debt increased by Rs 3,600 crore on-quarter to Rs 71,400 crore mainly due to capital expenditure of Rs 4,800 crore.

In an exclusive interview with Moneycontrol, Managing Director and Chief Executive Officer TV Narendran said second half of the year will be better but Europe may see economic rebound only next year. Narendran said the company is optimistic about strong steel demand in India and is on track for its planned capital expenditure of Rs 16,000 crore for the year.

"We believe the domestic business will perform well in the near-term considering the fall in coking coal prices and expectations of a demand recovery globally in 2HFY23; however, Tata Steel Europe will take some more time to become EBITDA positive as production is impacted due to BF relining at the Netherlands," B&K Securities said in a note to investors.

In the June quarter, Indian operations surpassed expectations in 1Q, but steel prices weakened amid a global demand softening and plummeting raw material costs. Analysts anticipate a Rs 1,500 increase in 2Q Indian operation EBITDA/tonne compared to 1Q, driven by lower coking coal prices. However, ongoing market weakness and BF relining are expected to sustain Tata Steel Europe operating level losses.