BackTata Steel: The ball is in the govt’s court
Since expenses declined less than sales did, operating profit fell by 57.6% sequentially to `776 crore
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Three governments hold the answers to when Tata Steel Ltd can see better days, at least in the near-to-medium term. The Chinese government is apparently considering reducing steel output in 2016, thereby curbing runaway steel exports. The European Union and the Indian government may introduce steps to curb steel imports in their respective regions. Any of these measures could benefit Tata Steel, but nobody is betting on them happening.
That is the backdrop in which the company’s ₹ 2,127 crore net loss stares you in the face. Both India and Europe are seeing a deterioration in profitability. Sales in the December quarter declined by 4.3% to ₹ 27,819 crore sequentially. But input costs fell by a lower figure of 2.5% and as a result, total costs declined by just 0.8%.
Since expenses declined less than sales did, operating profit fell by 57.6% sequentially to ₹ 776 crore. The amplified net loss figure is chiefly due to lower “other income" and higher exceptional items of expenditure. That is some consolation as not all of this will recur, but the drop in operating profitability itself is quite steep.
The problem is not with selling steel, as output rose by 1.3%. Lower realizations are the culprit. India and Europe both saw a decline in average per tonne realizations of about 6%. That’s why Europe returned a loss at the Ebitda (earnings before interest, taxes, depreciation and amortization) level of ₹ 2,017 per tonne, worsening from a loss of ₹ 425 per tonne in the preceding quarter. India’s Ebitda per tonne declined by over a fifth.
Europe remains a problem child. Tata Steel has announced restructuring plans, which should lower operating costs when successfully implemented. The company’s new steel project in India is also set to start production. Initially, as for all big projects, this project will weigh on performance, as all costs will reflect in the profit and loss account, even as output ramps up gradually.
More output in a market where prices are weak does seem a worry. Some of its competitors are also going to add capacity. But selling does not really seem to be a problem. Bigger firms are likely to take more market share away from the smaller ones.
The real issue is of protection from cheap imports. Once China’s plants restart after the lunar holiday, all eyes will be on whether the government suppresses steel output. If it does not do so in a meaningful manner, then it will fall upon governments of steel producing countries to ring-fence their domestic companies from imports. In India, the forthcoming budget may see some action on that. If it does not, then investors in steel stocks will lose more hope.
The Tata Steel stock has fallen by 17.5% since its high of early January. Its results disclose nothing that investors don’t already know and nothing suggests that better times lie ahead. They can only get back to speculating on whether the Indian government will take stronger steps to curb imports.
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