News Analysis

Improved volumes and better realisation drive performance of Tata Steel

Satya Sontanam | Updated on February 12, 2018

Tata Steel reported a four-fold increase in profits in the latest December quarter on the back of improved volumes in the domestic market and better realisations across markets. The company has recorded a consolidated profit of Rs 1,136 crore for the quarter ending December 2017, against Rs 232 crore for the same period a year ago.

Consolidated revenues for the quarter were at Rs 33,447 crore, which was higher by 15 per cent y-o-y and 3 per cent q-o-q. The company has recorded its highest ever quarterly sales of 3.3 million tonnes (mt) in the December quarter, which is a 10 per cent growth y-o-y. Indian operations contributed to about 50 per cent of overall volumes, a growth of 7 per cent q-o-q and 10 per cent y-o-y.

Volumes in the Indian steel market are currently driven by healthy demand from the auto and capital goods sector. While demand from construction is muted, it is expected to improve in the January to June period, usually regarded as a good period for construction.

The European performance was, however, weak owing to higher costs and reduced volumes attributed to the shutdown of the plant for maintenance activities. However, performance is expected to improve in the coming quarters.

The consolidated operating profit for the December quarter stood at Rs 5,801 crore, which is a rise of about 59 per cent y-o-y. Nearly 80 per cent of the operating profit was contributed by Indian operations due to the cyclical upturn in the commodities market that led to better realisations. Operating profit per tonne for the Indian operations has increased from nearly Rs 11,000 per tonne in the September quarter to Rs 14,000 per tonne in the December quarter. Also, the reduction of coking coal consumption cost has aided profitability. The company’s continued efforts to reduce the consumption of coking coal, will help bring down raw material cost further.

The overall EBITDA margins have improved from 12.4 per cent in the September quarter to 17 per cent in the December quarter.

Tata Steel has also achieved its best ever quarterly sales in the higher margin segments such as automotive and branded products, among others.

Good times ahead

Going forward, the outlook for the steel industry as a whole looks positive. The World Steel Association has estimated the growth of steel demand at 5.3 per cent in 2018. Steel prices are also expected to be healthy with revival in the domestic market. Tata Steel is well placed to reap the benefits.

In respect of the joint venture with Thyssenkrupp to restructure the European steel business, for which the memorandum of understanding was signed in September 2017, the company continues to expect cost synergies to the effect of €400 million to €600 million from the joint venture perspective. This is also expected to deconsolidate the debt by about €2.5 billion from the group’s balance sheet, which will be transferred to the joint venture. However, the details of the synergies and the timeline will be available only once the definitive agreement is made with Thyssenkrupp.

The board has also approved the 5 million tonnes per annum (mtpa) capacity expansion at Kalinganagar port that includes investment in upstream facilities, 2.2 mtpa cold rolling mill, and raw material facilities. The total project cost is estimated at Rs 23,500 crore. The company has spent a capex of about Rs 5,320 crore out of the planned expenditure of Rs 7,000 crore for FY18.

Published on February 12, 2018

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