Moneycontrol Pro Panorama | Tata Steel’s never-ending European nightmare

Tata Steel’s performance was affected by lower steel prices, resulting in a sharp drop in operating margins.

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Analysts are happy with an 82.5 percent drop in Tata Steel’s profit, simply because they had expected the company’s profit to drop by 91 percent. After a record-breaking profit of Rs 41,749.32 crore in FY22, Tata Steel’s net profit plunged to Rs 8,075.35 crore in FY23.

Despite the sharp drop in its profit, the company has announced a 360 percent dividend (Rs 3.60 on a paid-up capital of Re 1).

The company’s performance was affected by lower steel prices, resulting in a sharp drop in operating margins. Its EBITDA per tonne fell from Rs 21,626 to Rs 11,358, causing damage to its bottom line. EBITDA margin fell from 26.2 percent to 13.4 percent.

Tata Steel’s EPS has decreased to a mere Rs 3.29 in March 2023 from Rs 64.14 in March 2022. The company's consolidated revenue declined 9.2 percent YoY to Rs 62,961.54 crore, which was higher than the estimate of Rs 60,827.16 crore.

However, the company’s numbers are expected to recover from current levels as global steel prices have been rising on improved expectations about economic activity in Western markets and China. Steel spot spreads improved in Q4 FY23. Currently, China and EU spreads are above FY23, but below FY22 levels. However, factors ranging from geopolitics to concerns about global financial markets make for considerable uncertainty.

The biggest concern of the company is its European business. Tata Steel has raised concerns about the ability of its UK business to remain a ''going concern’’ on account of a potential economic downturn in Europe and continuing uncertainty over the adequacy of financial aid offered by the UK government.

A stress test conducted by the board to assess the potential impact of the economic downturn on Tata Steel Europe found that the mainland Europe business has adequate liquidity but the UK business could be adversely impacted.

Higher inflation, higher interest rates and supply chain disruption caused by the war in Ukraine were cited as the external factors for an economic downturn in Europe which may impact the future business outlook for the UK and the mainland Europe value chain.

“Given the risks and challenges associated with the underlying market and business conditions, the uncommitted nature of available financing options and the uncertainty with respect to whether adequate government support would be agreed upon, there exists a material uncertainty surrounding the impact of such adversities on the financial situation of TSUK,” the note added.

Though Tata Steel’s debt and liquidity situation is reasonably strong, its Europe business, especially in the UK, will be a big overhang on investors' minds.

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