Tata Steel rebound to take a while amid weak demand
The company’s Indian business remains the main business due to captive iron ore mines, it generates much more operating profit and cash flows than other businesses.
The recent nod for the minimum import price for steel products from the government to protect the Indian steel industry from cheap imports may provide some relief but that does not guarantee a turnaround in the company’s business. Investors may do better to wait for the benefits to be reflected in its numbers. At present, the industry enjoys a high import duty (which will be replaced by the minimum import price), but that has not much helped the industry, including the largest steel company — Tata Steel.
In the December quarter, Indian business sales dropped 8.4% year-onyear and net profit fell 49%. This was because of low steel price per tonne realisation due to high imports mainly from China, Japan and Korea. The company’s Indian business remains the main business due to captive iron ore mines, it generates much more operating profit and cash flows than other businesses. According to the management, there has been some uptick in demand from the government but demand from the private sector continues to remain weak.
In Europe, although the sales were up 1% year-on-year, the loss widened due to low realisation and low margins. An appreciating UK currency also negatively impacted as it lowered competitiveness. It may be difficult to predict when the turnaround of this business will happen. While profits were at record lows, the debt was at a record high. The total debt increased by Rs 1,500 crore to Rs 75,000 crore. There is concern on how the management will manage to bring this down, given the current situation.
Valuation-wise, Tata Steel’s stock is trading at 0.7 times price to book and 13.6 times EV by EBIDTA. The stock has seen lower levels. On Friday, it opened 5% down due to weak results, but closed 3.4% higher than the previous close in anticipation of the MIP introduction on the steel industry. Existing investors may consider selling on rallies as a clear turnaround is sometime away.