Title: Sector headwind to continue for Tata Steel
ET Intelligence Group: Tata Steel’s December 2018 quarter earnings failed to surprise analysts. However, the short-term outlook is favourable given a sharp rise in iron ore prices, extension on import duties by Europe and a jump in domestic steel prices.
In the December quarter, consolidated EBIDTA (earnings before interest tax and depreciation) fell 25 per cent sequentially to Rs 6,734 crore as the domestic realizations and volumes dropped across verticals due to slack demand from the auto and consumer segments and increased imports. Sales volume dropped by 5.8 per cent over the preceding quarter resulting in 5.3 per cent fall in revenue to Rs 41,220 crore.
EBIDTA for the Indian business, the recently acquired Bhushan Steel, Europe and South East Asia fell by 24 per cent, 19 per cent, 15 per cent and 91 per cent in that order. The European business was impacted due to shutdown of Port Tablot blast furnace as a part of maintenance programme and other operational issues according to the management. The South East Asian business was impacted due to sluggish demand in Singapore and Thailand.
Several other factors work in favour of Tata Steel. International iron ore prices (a major raw material) have rallied over 20 per cent in the past two weeks to more than $92 per tonne due to the shutdown of the largest mine in the world by Brazil based Vale after a major accident. This price surge is a negative for most steel producers, but not for Tata Steel. Thanks to the captive ore mines, Tata SteelNSE 1.70 % India has an advantage over its peers. A 2 per cent steel price hike taken earlier this month in the domestic market will further aid margins. Also, an extension of customs duty of 25 per cent on steel by Europe is a positive for Tata Steel Europe.
These positive factors may offer support to the stock price. Which has fallen 18 per cent in the past three months. But, in the medium term, global slowdown and trade barriers will continue to weigh on the sector. At the Friday’s closing stock price of Rs 468.7 on the NSE, the company’s enterprise value was six times the FY20 expected EBIDTA.