Q2FY24 performance: Cautious near-term outlook for Tata Steel stock

The operational performance of Tata Steel in Q2FY24 can be interpreted in several ways.

There was an acceptable domestic performance in India but there continues to be concerns about the Europe business and that overshadows the local performance.

The consolidated revenues for the Q2FY24 stood at Rs 55,682 crore with an operating profit of Rs 4,315 crore and an operating profit margin of 8 per cent.

The revenues were down 7 per cent year-on-year (Y-o-Y) and down 6.5 per cent quarter-on-quarter (Q-o-Q).

The margin dropped from 11 per cent (Y-o-Y and Q-o-Q).

Operating profit was down 29.5 per cent sequentially and down 31.2 per cent over the year ago quarter.

The company had a capex of Rs 4,553 crore during Q2FY24 and Rs 8,642 crore for H1FY24.

The 5 million tonnes per annum (MTPA) expansion at Kalinganagar and 0.75 MTPA electric arc furnace (EAF) project in Punjab are under implementation.

The net debt stands at Rs 77,032 crore and the net debt/operating profit ratio is around 3.5 and net debt to equity is about 0.8 times.

Indian operations benefited from lower coking coal prices and a marginal decline in iron ore costs compared to Q1FY24.

The India operation revenues were Rs 33,922 crore and operating profit was Rs 6,841 crore.

The India operating margin was 20 per cent.

The Europe revenues were £1,812 million and the loss at the operating level stood at £242 million.

The consolidated steel production was 7.31 million tonnes (MT) in Q2FY24, up 2.5 per cent Q-o-Q and consolidated steel deliveries came in at 7.07 MT, down 2 per cent sequentially.

The consolidated operating profit/tonne fell to Rs 5,869 per tonne for Q2FY24 vs Rs 8,503/tonne during Q1FY24. Europe sales volumes declined 9 per cent sequentially to 1.81 MT but realisations/tonne improved slightly.

Operational efficiencies were reasonable in the Netherlands but furnace relining (which should be complete in November) impacted volumes.

The UK operations suffered from low steel prices as well as higher costs on the emission rights front.

Negotiations continue with workers in the Tata Steel UK (TSUK) unit.

UK government support for the TSUK plant will be about GBP 500 million while the company will contribute around GBP 750 million in phases to switch technology to reduce emissions at the plant in Port Talbot.

There are exceptional items of Rs 6,899 crore in the consolidated P&L including an impairment charge of Rs 2,631 crore for TSUK and a provision of Rs 2,425 crore towards restructuring costs (including potential asset closure and redundancy costs) in TSUK.

There was also the conversion of $4.2 billion loan given to wholly-owned subsidiary T Steel Holding into equity.

This is reflected as carrying value of Rs 34,170 crore as investment in equity shares.

The board also approved amalgamation of seven companies into itself at earlier agreed share swap ratios.

After adjusting for impairments and adjustments, there was a net loss of Rs 6,511 crore in Q2FY24 versus net profit of Rs 525 crore in Q1FY24 and of Rs 1,297 crore in Q2FY23.

Management guidance is that economic activity in Europe continues to be weak, reducing demand and prices, while China is exporting steel due to lack of domestic demand in China.

It claimed Indian demand is picking up on the back of improved demand in the automotive sector.

The stock market reaction has been somewhat positive and analysts continue to believe in the company over the medium to long term.

A macro turnaround in Europe whenever that occurs, as well as the rejigging of TSUK, would be potential positives.

But there’s reason to be cautious in the short term.

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