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European sorrows continue to hurt the consolidated performance

Result Synopsis

Tata Steel’s Q2FY24 performance was below the consensus estimates on account of provisions created by the company for the restructuring and the impairment of assets of the UK business and the resulting poor performance on the European front. During H1FY24, the company has incurred Rs 8,642 crores of capex. Work on 5 MTPA expansion at Kalinganagar and EAF mill of 0.75 MTPA in Punjab is progressing as planned. Tata Steel Europe however was a drag on the consolidated performance of the steel major reporting an EBITDA loss of Rs 25,110 mn. The blast furnace in Netherlands will be soon functional and the Netherlands business is expected to turn cash positive and EBITDA positive by the end of the next quarter. For the UK business, the picture still looks gloomy as the company is still in formal talks with the unions. The company however created provisions for impairments and restructuring losses to be expected due to the closure of the heavy end assets at Port Talbot. On the cost front, the company did benefit from the falling coking coal prices however this was offset by falling realizations as well. The global steel pricing pressure has capped the top-line growth for the major steel producers; however, the management believes that the steel prices have largely bottomed out.

In terms of the operational performance, the consolidated production stood at 7.31 mt, reporting a fall of 3.3% on a YoY basis and a growth of 2.5% on a QoQ basis. The production downfall is on the back of the blast furnace shutdown in Netherlands for relining purposes. The deliveries also took an impact due to the bad macroenvironment for steel demand in the US and the European regions. The deliveries for the quarter came in at 7.07mt, a fall of 2.2% on a YoY basis, and a fall of 1.8% on a QoQ basis.

We retain our target price for Tata Steel at Rs 133/sh and have an ADD recommendation for the company. We see the next couple of quarters to show slow growth in lieu of the rising coking coal prices. However, with the new capacities coming in for the Indian Steel Sector and Tata Steel, we expect margin expansion on the back of the volume growth.

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