Tata Steel’s Q3 is fine, but debt remains in focus
PremiumA potential rise in Chinese steel production and exports to boost its economy, may weigh on prices, and remains a risk
Tata Steel Ltd’s (TSL’s) shares closed 0.5% higher on Monday versus the Nifty 50 index’s drop of 1.7%. The company’s December quarter (Q3FY22) results were decent, with strong realizations supporting revenue growth. Consolidated operating revenue rose by nearly 45% year-on-year (y-o-y) and was marginally higher sequentially at ₹60,783 crore.
Higher costs are hurting though. While consolidated Ebitda rose by 66% y-o-y to ₹15,895 crore, it was down 3.4% from Q2. In a report on 5 February, analysts from ICICI Securities Ltd said, “TSL India’s Ebitda declined ₹2,100 per tonne q-o-q." Here, gross margin contracted by ₹1,000 a tonne quarter-on-quarter (q-o-q) and the rest was on account of operating leverage as volumes declined 4% q-o-q.
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“Tata Steel Europe (TSE) surprised with only $30 per tonne of q-o-q drop in Ebitda; with higher coking coal prices and downtrending steel realizations, the fall should accelerate in the coming quarters," the brokerage firm added.
Meanwhile, TSL’s 74.91%- owned unit Tata Steel Long Products was recently declared the winning bidder to acquire Neelachal Ispat Nigam Ltd (NINL). The company will front-end the acquisition financing largely via internal accruals and short-term bridge funding. Even so, analysts worry about the impact on debt owing to the deal.
Tata Steel’s net debt fell about ₹6,000 crore. “This reduction is short lived as the company will have to incur ₹12,100 crore towards acquisition of 93.71% stake in NINL in Q4FY22. This will wipe out a large part of the deleveraging achieved by the company in FY22," analysts from Motilal Oswal Financial Services wrote in a note.
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In a post Q3 call, Koushik Chatterjee, executive director and chief financial officer, Tata Steel said, “We remain focused on enterprise strategy to deleverage the balance sheet while pursuing growth priorities. With the NINL acquisition, TSL doesn’t expect the credit metrics moving much at the end of the financial year and TSL would continue to deleverage during the fourth quarter and beyond." The drop in debt levels was a factor responsible for the significant outperformance in the TSL stock over the past year. Hereon, global steel prices are a key monitorable. A potential increase in Chinese steel production and exports, may weigh on prices and that remains a risk. Higher coking coal prices are another risk factor to watch out for
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