Tata Steel may turn a corner as subsidiary’s Q2 results shows recovery on track

Posted on 16 October 2020

After a dull June quarter, the steel sector is building up a case for a turnaround. Tata Steel could have racked up profits in Q2 after covid-19 disruption. Its subsidiary Tata Steel BSL’s decent jump in volumes has seen it post a sharp recovery. And will also drive gains for the parent. Tata Steel’s stock inched up about 3% on Thursday on expectation that the firm will report an improvement after covid-19 roiled operations.

But it has also been a quick turnaround for Tata Steel BSL. The company’s second quarter volume growth of about 23% year-on-year confirms the recovery. Besides, average selling prices were also better in the second quarter. A bump up in volumes and improvement in average selling prices is good for profitability.

To top it, iron ore prices and cost cuts have bolstered operating metrics. BSL’s operating profits were at an eight-quarter high. As a result, BSL notched an Ebitda per ton of about ₹8,600, a jump of about 72% from the year-ago quarter. Ebitda is earnings before interest, tax, depreciation and amortization.

International demand that had supported the steel sector during the peak of the pandemic is now slowly being replaced with recovery in domestic demand. A fact reflected in Tata Steel’s performance. The steel major’s volumes rose about 18% y-o-y in Q2. Notably, shipments to auto firms improved by about 10% and market share gains seem to be on the cards.

Tata Steel’s standalone Q2 domestic steel volumes are expected to rise 71% sequentially, say analysts, while European operations are also expected to see better volumes. With demand improving, yearly growth might also be looking up.

“The recovery in global as well as Indian steel demand and prices, along with production normalization, should drive sequentially better volumes and margins for Tata Steel,” said Jefferies in a client note.

The effects of lower iron ore prices and cost savings should also be evident in Tata Steel’s Q2 performance. “Domestic price uptick sequentially is likely to increase domestic Ebitda per ton by two times to INR11,900/t in Q2FY21,” said analysts at Edelweiss Securities in a client note.

Of course, the stock price is already reflecting much of the volume growth. But Tata Steel’s turnaround to profitability in one quarter has also buoyed markets. Still, some of this recovery could be tested once pent up demand after re-opening begins to normalise.

Source : Live Mint