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Geographical diversification brings depth and scale to business. It also exposes the company to market vagaries in foreign locations. Take the case of Tata Steel and Hindalco Industries which are leading the losses in the Nifty 50 shares in Tuesday afternoon trade.
Tata Steel slipped into losses in the December 2022 quarter, pulled down by its weak Europe business. Similarly, Hindalco’s key subsidiary in the US, Novelis Inc, reported sharply lower profits on reduced product offtake by customers and soft realisations. “We are navigating a challenging period of intensified inflationary headwinds,” said Dev Ahuja, executive vice-president and chief financial officer of Novelis, in a statement.
Tata Steel’s India business fared better than its Europe operations. The company also sees better prospects in its India business, helped by the government’s thrust on infrastructure spending. On the other hand, the outlook for the Europe business is clouded by geopolitical tensions, inflation and tight monetary policies. The company sees a gradual recovery in end-use industries such as automobiles. “Economic activity remains subdued,” Tata Steel said in an investor presentation, referring to Europe.
Tata Steel is reorienting its business to India. But Europe remains a laggard and continues to weigh on the consolidated entity’s performance. The situation at Hindalco is different. Even so, Novelis continues to have a determining role on Hindalco’s earnings and stock returns. Analysts fear the performance may remain muted in the near term.
The beverage can sheet market, a large customer segment at Novelis, is seeing inventory normalisation in the US. This is expected to weigh on Novelis’ sales and earnings. “The continuous beverage cans destocking and high cost leads to near-term earnings uncertainty,” analysts at Nuvama Research said in a note. In comparison, Hindalco's India business is expected to fare relatively better, helped by lower input costs.
Of course, metal prices in India and Asia are contingent on the recovery in China. But investors in companies with a global presence currently have to worry about weak demand trends also, especially in the US and European markets.
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R Sree Ram Moneycontrol Pro
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