News Analysis

Favourable market conditions boost Tata Steel’s Q3 profitability

Satya Sontanam | Updated on February 10, 2021

Deleveraging exceeds annual target of $1 billion

Tata Steel reported an impressive earnings for the quarter-ended December 31. The consolidated net profit was at Rs 3,989 crore, as against loss of Rs 1,166 crore during the same period last year. The operating margins too skyrocketed to 24 per cent during the third quarter of FY21, as against ten per cent a year-ago.

Clearly, the rise in steel prices and an improvement in the domestic steel consumption gave a leg-up to the earnings of the company. Further, company’s focus on the value added products resulted in better realisations and operating profit. 

What really surprised is the reduction in net debt from Rs 96,495 crore by the end of September 2020 to Rs 86,170 crore by the end of December 2020. It was driven by good free cash flows of over Rs 12,000 crores on the back of strong underlying operating performance. This surpassed the company’s annual de-leveraging target of $1 billion. 

Higher Realisations 

During Q3FY21, Tata Steel reported consolidated revenue of Rs 39,594 crore, a growth of 11.5 per cent y-o-y. This is despite the lower sales volumes of 6.88 million tonne (as against 7.31 mt), given that the market is still in a recovery state. 

Tata Steel Indian operations generated about 65 per cent of the consolidated revenue of the company and grew by 18 per cent (y-o-y). The better than expected revenues are significantly due to improved steel prices, which have gone up by about 34 per cent (y-o-y) to Rs 47,000 (as per SteelMint) in the quarter ending December 2020.

This is again due to the strong demand recovery for the metal globally, especially China.

The domestic market went up by 11 per cent (y-o-y) to reach 28.09 mt. To give a perspective, the domestic consumption of steel fell 7-10 per cent y-o-y in the September quarter. 

The above factors lead to average realisations of Tata Steel improving to Rs 54,217 per tonne from Rs 43,915 per tonne a year ago. Lowering exports – on which the realisations are at discount - by about 40 per cent y-o-y also helped the company to improve the realisations. 

Buoyed by healthy realisations, the operating profit per tonne from the Indian operations in Q3 FY21, more than doubled to Rs 18,931 per tonne compared to Q3FY20.

Also, focus on volume mix helped the company improve the profitability during the said period. Share of value added products in overall sales volumes increased to 45 per cent as against 41 per cent, a year ago. 

The only spoiler is the performance of the European operations, where the demand was still lukewarm on the back of Covid-19 induced slowdown. This segment reported operating loss of Rs 724 crore during the December 2020 quarter as against loss of Rs 956 crore in Q3 FY20.  

Going ahead 

As per the management, the rise in steel prices during the quarter were not completely realised in the earnings due to the lag effect. Thus, Q4 of FY21 is expected to be better in terms of realisations to the company.  

In terms of debt position, the company is expected to reduce the gross debt further by Rs 10,000 – Rs 12,000 crore in the next quarter. Even for the long-term, the management indicated that the debt management continues to be on target. The future cash flows are expected to be focussed on deleveraging first, and then on critical and ongoing capex that includes Kalinganagar expansion project and only after that towards the growth capex. 

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Published on February 10, 2021
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