Tata Steel’s Q1FY24 results provided an improving outlook for its Indian operations (57 per cent of Q1FY24 revenues) and continued uncertainty for its European arm (35 per cent) – at least for FY24.

Tata Steel is in discussions with the UK government to improve its operating model in the country, given the elevated energy costs. This is expected to reach a conclusion in H2FY24 - from when European recovery can start. In India, the company is in the midst of a high capex mode and expects to double its steel capacity by 2030. The financial leverage has started inching up owing to capital commitments, but expected to normalise.

Tata Steel reported a 6 per cent y-o-y decline in revenue to ₹59,490 crore in Q1FY24. Indian revenues were flat and Europe reported a 16 per cent y-o-y revenue decline as one plant was under maintenance. With deferred tax assets impacting reported tax, PAT reported a decline of 93 per cent to ₹525 crore y-o-y.  

Europe impacted operations

Steel prices are showing recovery. India and Europe reported a 2 per cent and 5 per cent sequential recovery in revenue per tonne this quarter even as they are 15 per cent and 10 per cent lower y-o-y. The company reported higher domestic demand (up 10 per cent y-o-y) to be a strong supporting factor to prices in India. But slower than expected recovery in Chinese demand can add an excess supply of Chinese exports impacting steel prices internationally and in India.

Tata Steel UK had been loss-making at the EBITDA level in the last three quarters owing to higher energy costs and normalised steel prices. Netherlands operations were profitable earlier, but with one of the two furnaces is undergoing maintenance (relining); the sales volume decreased, which impacted profitability.

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Tata Steel Europe reported a 38 per cent y-o-y growth in RM (raw material) cost per tonne in the quarter. This compared to a 6 per cent decline in India. The company hedged a portion of the RM cost, which is also delaying the benefits of lower spot prices in Europe to flow through the P&L.

Netherlands operations and profitability will resume in H2FY24 as maintenance is complete. But UK operations need government support, policy, and fiscal, to improve profitability. The current discussions are expected to lead to a plan by H2FY24 before turnaround can be achieved. Losses in Europe (-7 per cent EBITDA margins in Q1FY24) are impacting consolidated profitability at 10 per cent in the quarter compared to 23 per cent EBITDA margins for India.

Capex and leverage

Recently acquired Neelanchal Ispat (NINL) is closer to rated capacity within 9 months of acquisition. The 5 Million Tonnes (MT) expansion at Kalinganagar is progressing well and volume contribution can be expected by FY25. The company aims to grow to 40 MT capacity by 2030 from the current 21 MT capacity with all of the addition focused in India.

Financial leverage, which was at 2 times net debt to EBITDA in FY23 has increased to 2.9 times in Q1FY24. The company plans to limit the ratio to 2.5 times and will have a tough trade-off in achieving this considering the rich pipeline of capital commitments. An earlier resolution in the UK plant and profitability in Europe can improve Tata Steel’s prospects further. The company is trading at 5.2 times FY25 EV/EBITDA, which is in line with its historical range.