Tata Steel Losses

What exactly has gone wrong?

There was always the worry over the Tata Steel numbers in the light of global glut and falling steel prices. But the losses announced by Tata Steel for the third quarter were more than twice what the street had anticipated. Against street expectations of Rs.1000 crore losses in this quarter, Tata Steel ended up with a net loss of Rs.2127 crore. What was the reason for this steep loss and how fundamental is the problem at Tata Steel. More importantly, what could be the outlook for the stock?

Disappoints on top-line…

 The revenues were down by 18% at Rs.27,820 crore. The fall in top line was understandable as the price of steel has been hit by the cheap imports coming in from China. The street was estimating a top-line nearly Rs.1000 crore higher. With China faced with almost 30% excess capacity in steel it has been trying to dump cheaper steel into other countries. India has borne the brunt of this dumping; despite the anti-dumping measures initiated by the current government. In terms of volumes, Tata Steel sold 6.37 million tons versus 6.29 tons. This implies that the pressure came predominantly on the pricing front and not on volumes front.

EBITDA also disappoints…

The EBITDA was almost 70% lower compared to the last quarter. This was a direct impact of lower steel prices. With most costs being sticky, the impact on the EBITDA was sharp. In fact, the EBITDA per ton fell to a low of Rs.1317/ton, one of the lowest that Tata Steel has ever seen in its steel business. With the steel glut likely to continue and prices unlikely to pick up with huge global capacity, the EBITDA is likely to continue to be under pressure.

Europe was a key reason…

While the Indian operations also disappointed, it was the European operations that actually caused the huge loss for Tata Steel. Additionally, the company also took an Rs.711 crore hit on its profit this quarter as restructuring costs pertaining to its rationalization of European steel operations.

The road ahead looks quite difficult for Indian steel companies as companies from China, Japan, Korea and Russia are able to supply steel at much cheaper costs. It is not just about Tata Steel; even JSW Steel reported a loss of Rs.923 crore this quarter, indicating how endemic the problem of steel industry is right now. As the Tata Steel CEO, T V Narendran has admitted, it could be the bottom as far as steel prices are concerned. The immediate challenge would be a sharp pick-up in demand for steel. With China focusing on consumption rather than investment, that looks some time away. For the medium term, the pressure on steel stocks looks set to continue. ©

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