Realisations and steel prices are much better compared to last year’s average, which makes the management even more confident of delivering better numbers
Strong volume growth in both the international and domestic business and an improvement in international steel prices helped Tata Steel close FY18 with a strong sales growth of 13.3 percent year-on-year (YoY) at Rs 133,016 crore.
Thanks to cost saving and internal efficiencies, the company’s overall earnings before interest, tax, depreciation and amortisation (EBITDA) rose 29.5 percent YoY at Rs 22,045 crore. With the Kalinganagar plant and international operations contributing to volumes, the management is upbeat about FY19.
Realisations and steel prices are much better compared to last year’s average, which makes the management even more confident of delivering better numbers. Stabilisation of Kalinganagar plant and cost savings in international operations would only add to its profitability.
In FY18, the biggest contribution was made by the domestic business which reported a 10.8 percent YoY growth in delivery volumes to 12.15 million tonne (MT), as against a 0.6 percent YoY growth reported by the European business, which accounts for 45 percent of the group’s turnover.
Due to higher realisation and cost optimisation at Kalinganagar plant, EBITDA per tonne for its domestic operation saw a 19.4 percent YoY growth at Rs 13,000 in FY18. Benefits were actually higher in the second half. For instance, domestic EBIDTA per tonne was around Rs 16,000 in Q4 FY18 indicating that FY19 should see the benefit of cost efficiency and better pricing.
In Europe, volume growth has been marginal because of slow demand growth and high contribution of imports. However, its European operation was able to deliver Q4 and FY18 sales growth of 6.3 percent YoY and 15.2 percent YoY, respectively.
The management is making all efforts to improve the product mix and rationalise cost. It launched 23 new products in Europe, part of which was caters to electric vehicles. With UK pension restructuring complete, operation issues will ease further.
In FY18, its domestic operation fared well and will continue to drive overall growth because of higher volumes and better pricing environment in the domestic market. The management indicated that current realisations are better than H2 FY18 and benefits of the same will be seen in coming quarters.
In FY19, the company expects domestic volumes of about 12.5 MT as against 12.1 MT YoY. With the earnings momentum continuing and benefits of restructuring of the European business kicking in, the company appears well placed.
In terms of valuations, the stock at Rs 622 per share is trading at eight and six times its FY19e and FY20e earnings, respectively, is quite reasonable.
It would be worth tracking the progress of Tata Steel’s strategy with respect to the integration of Bhushan Steel for which it has recently received National Company Law Tribunal and Competition Commission of India’s approval. Bhushan Steel has 5.5 MT capacity and is currently operating at 3.5 MT.Moneycontrol Research page