Europe saves Tata Steel from margin blushes in Q1 - Livemint

Tata Steel said that it benefited from a higher proportion of value-added steel products in Europe. Lower raw material prices and cost-cutting measures, too, have improved its margin profile. Photo: AFP

Tata Steel Ltd sells four out of every five tonnes of steel in its main markets of India and Europe. Typically, Europe plays a bigger role in revenue, selling 50% more in terms of volume than India does, but India lords over the company’s profitability. It contributes nearly 75% of the company’s consolidated Ebitda (earnings before interest, taxes, depreciation and amortization). But this quarter things were a bit different.

Europe has faced difficult conditions for years now, but India too has of late seen its slowing economy hurting steel demand. Viewed in this sobering backdrop, Tata Steel ’s June quarter financials are not bad at all. It sold 6% more steel compared with a year ago, with India’s sales rising by 5% and Europe growing by an abysmal 2%. But Europe did report a sequential decline of 21.4% in sales, partly due to a high base effect.

In the domestic market, realizations were under pressure on a sequential basis, with a 1.5% decline in average realizations. But Europe did better with an 8.2% increase. It said that it benefited from a higher proportion of value-added steel products. Lower raw material prices and cost-cutting measures, too, have improved its margin profile, apparently. Therefore, Europe’s Ebitda margin touched 4.8%, a sequential improvement of 1.4 percentage points.

However, India’s profitability declined compared with the March quarter, mainly because of a sharp increase in salaries, attributed to pay increases and an increase in provisions for retirement pay-outs. This may not increase in the same fashion every quarter. That brings us to its overall performance. Tata Steel’s consolidated revenues rose by 11% to Rs.3,6427.2 crore over a year ago. Its operating profit margin rose by 49 basis points though it fell by 8 basis points sequentially. Profit before tax and exceptional items rose by 14.2% over the year ago period. Exceptional items and a higher tax provision skewed its net profit figure.

That seems like a decent performance. Can Tata Steel sustain or even improve upon it? India’s economy is a main contributing factor. Everybody seems confident it will recover but the question is when. If sectors such as automobile and construction show a sustained pickup in demand, they should be convincing early indicators of good news for steel companies.

In Europe, the steel market is forecast to grow by 2.9% and Tata Steel expects raw material prices to be stable and will continue to cut costs. But it talks of a threat from cheaper imports posing a risk to the improvement seen in margins.

Some quarters may see some volatility in numbers till the recovery sets in. But the general environment seems conducive for Tata Steel, which has modernized and is expanding its capacity.

The stock has already risen by 56% since mid-March and perhaps realizing that it got ahead of itself, has been flat since early-June. It may not do much till investors get clear signs of a domestic recovery or better trends in Europe.