Published on 7/11/2019 2:02:27 PM | Source: Live Mint

Tata Steel`s Q2 numbers show recovery in the steel market is not coming easy

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It’s been a challenging quarter for Tata Steel Ltd September quarter profit may have belied expectation but a closer look at the other numbers show that economic conditions are bleaker than anticipated. While tax write-backs aided net profit, shares of the steel major, down about 4% in trade on Thursday, reflect muted demand conditions.

Tata Steel’s second-quarter revenue fell 15.4%, year-on-year. Weak steel demand, particularly from the automobile sector, has stunted revenue growth. Even quarter-on-quarter, revenues have dipped 3.8%. In fact, this is the second straight quarter of lower revenue for the company.

Besides, its Ebitda (earnings before interest, tax, depreciation and amortisation) fell a steep 56% from the year-ago quarter. Higher costs have been a burden on its operating parameters. While revenues dipped 15%, operating expenses were down only about 3.6%. As a result, the Ebitda margin slid to 11.3% from 21.7% in the year-ago period.

Given that steel market recovery looks slow, Tata Steel has scaled back its capital expenditure plans. Initially, it had settled on Rs.12,000 crore capital expenditure, but has now reduced this to Rs.8,300 crore, reflecting the greater stress in the steel world. This number could be further reduced in the coming quarters.

Tata Steel’s net profit climbed 6% year-on-year, thanks to a sharp write-back in tax provisions of about ₹4233 crore in total. It wrote back a significant portion of deferred tax, even as it made a significantly lower tax provision in the quarter. In FY19, the effective tax rate for its standalone operations was 35%. Analysts have said gains from this cut in corporate tax could be substantial.

A positive is that iron-ore prices are now lower, while domestic steel prices are showing signs of stability. The government’s revival package for low-cost housing could improve conditions in the long-steel products market. Tata Steel, though, despite the challenging environment, has kept its domestic production at levels similar to those of the first quarter, at about 4.5 million tonnes. Another factor to watch out for is the China-US interim trade deal, the signing of which has been deferred to December.

The nearly 31% fall in its stock price in the past one year may be supportive for now, but much will depend on a steely revival in domestic demand. Some of that will have to come from the auto sector, which remains in the grips of a slowdown.