Tata Steel: With better pricing and demand, expect a better second half FY18

The right product mix and consolidation among marginal players have helped companies like Tata Steel grow faster even in a seasonally weak quarter.

Despite poor operating environment and pricing pressure in the September quarter, Tata Steel posted good set of numbers helped by strong volume growth in the domestic business. The company, on a consolidated basis, reported 33 percent year-on-year (YoY) growth in sales to Rs 32,464 crore and reported a profit of Rs 1,018 crore as against a loss of Rs 49 crore last year.

Domestic operation drives growth

Domestic operations, which account for almost 50 percent of the sales volumes, have shown 18 percent volume growth as a result of full swing production at its newly-commissioned plant in Kalinganagar. The right product mix and consolidation among marginal players have helped companies like Tata Steel grow faster even in a seasonally weak quarter. Along with volumes, the company also benefited because of higher realisation.

On average, compared to the June quarter, domestic and international steel prices corrected in the September quarter. This is also a reason why there was a drop in realisation on quarter-on-quarter (QoQ) basis, but domestic realisations at Rs 46,172 per tonne were up by 3 percent on a YoY basis.

The performance of European operations was mild, but 8 percent growth in volumes to 2.6 million tonne along with 15 percent growth in realisation to Rs 57,715 per tonne helped in overall performance. European operation reported 25 percent YoY growth in sales to Rs 15,000 crore in the second quarter.

However, due to lower spread and cost pressure, the European operation’s EBITDA declined from Rs 5,210 per tonne in the second quarter of FY17 to Rs 2,896 per tonne in the second quarter of the current fiscal. During the quarter, raw material cost increased by 25 percent on a year-on-year basis.

Expect second half to be better     

The company is hopeful of a better show in the second half of the current financial year. Tata Steel kept its domestic volume guidance intact at around 12.3-12.4 million tonne as against 11 million tonne in financial year 2017. It expects domestic demand to improve with the easing concerns over GST. The company also expects pickup in flat steel demand used in automobile and white goods industry.

In Europe also, post December, which is generally a holiday period and a dull quarter, the company expects to put up a decent show largely backed by stability in prices and better volumes in the March quarter. This is also reflected in consensus estimates. The Street is expecting net profit of close to Rs 6,700 crore in FY19 as against net profit of Rs 3,700 crore in FY17.

Valuations: Moderate expectations

However, on the valuation front, these expectations are already built into the share price. At Rs 720 a share, Tata Steel is trading at 10 times consensus estimated earnings and 7 times enterprise value to EBITDA of FY19, which makes it little overvalued and warrants tempered expectations.