Tata Steel Review: Q2 in-line, losses in Europe business likely to decline ahead

Tata Steel Q2 Results mostly met the Street’s projections. On the back of Tata Steel Europe, which was expected to record earnings before interest, taxes, depreciation, and amortisation (EBITDA) losses owing to low volumes and realisation, analysts had anticipated a sharp drop in profitability during the quarter that ended in September. At 12:10 IST, Tata Steel share price was trading flat at ₹118.05 apiece on BSE.

For the quarter that ended September, Tata Steel reported a net loss of ₹6,196.24 crore for the quarter ended September. The steel makers, total revenue from operations also dropped by 7% year-on-year (YoY) to ₹55,681.93 crore for Q2FY24.

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The steel maker had reported a consolidated net profit of ₹633.95 crore in the September quarter of FY23. Its total revenue from operations declined by 7% YoY to ₹55,681.93 crore in September quarter of FY24, against ₹59,877.52 crore in the September quarter of FY23.

For the quarter ended September, the company reported an earnings before interest, taxes, depreciation, and amortisation (EBITDA) of ₹4,315 crore, while margins were at ₹8%, as per the company’s release.

Also Read: Tata Steel Q2 results: Company reports net loss of ₹6,196 crore

The company in its exchange filing said that its revenues in Europe amounted to £1,812 million, with an EBITDA loss of £242 million. The Netherlands’ improved operating efficiency was the main driver of the QoQ gain. The country produced 1.95 million tonnes of liquid steel. Due to a combination of low demand and the current relining of one of the blast furnaces at Ijmuiden, which is scheduled to be finished in 3QFY2024, deliveries stood at 1.81 million tonnes and were slightly below that level.

Also Read: Tata Steel share price closes with 1% gains a day after Q2 results

US brokerage house Citi has downgraded Tata Steel’s rating to ‘Sell’ and has cut the target price from ₹140 to ₹100 due to concerns on domestic steel prices, and Europe spreads, and company’s leverage conditions.

“India steel prices could have downside risk if China prices do not rise. While Tata Steel expects Netherlands to turn EBITDA positive in 4Q (2Q loss $113/t) as BF relining is completed, worry about spreads as spot Europe steel prices have contracted to $650/t vs. CY23 avg of $790/t. Situation in UK is worse with 2Q EBITDA loss at $228/t. There is uncertainty on restructuring planned and future profitability,” said the brokerage, according to various media reports.

Let’s take a look at what the domestic brokerages have to say post Tata Steel’s Q2 Results;

Nuvama Institutional Equities

The brokerage has maintained India’s EBITDA while reducing FY24E EBITDA by 19% to account for greater losses in Europe. According to the brokerage, losses in the UK will start to decline in FY25, and the Netherlands operation should generate a profit by Q4 of FY24.

“We expect the Indian operations to report an EBITDA of ₹15k/t-plus owing to higher steel prices, and European operations to continue to bleed in Q3 while the Netherlands reverts to profit in Q4FY24. TSL is moving in the right direction and focusing on Indian operations while weeding out loss-making UK operations. We are awaiting the outcome related to the UK plant closure. Maintain ‘BUY’,” said the brokerage.

Also Read: Tata Steel Q2 Results Preview: Net profit may fall sharply dragged by European operations; revenue seen down 6% YoY

Kotak Institutional Equities

Consolidated adjusted EBITDA for the company’s 2QFY24 was 6% below projections from the brokerage, mostly due to lower margins in India and rising losses in Europe. The brokerage anticipates that margins in India will stay strong, while in Europe EBITDA breakeven should only occur in 4QFY24E.

“Tata Steel has made a restructuring and impairment provision of ₹64 bn toward UK assets and expects to conclude the employee consultation soon. Ongoing expansion projects in India are on track to commission over the next 12 months and would aid earnings. Inexpensive valuations make the risk reward attractive. We trim earnings and FV. Maintain BUY,” said the brokerage.

Tata Steel recorded an in-line operating performance in the second quarter of FY24, helped by higher operating efficiency, lower input costs, and greater volumes in the India division. Despite the significant exceptional loss that Tata Steel announced, the management has projected that there won’t be any more one-time losses from Tata Steel operations.

“BF at the Netherlands is expected to come on stream in 3QFY24. With strong demand from domestic automobile, construction, consumer durables and rural customers, we believe Tata Steel is expected to achieve its yearly sales guidance. Tata Steel has guided for a lower coking coal cost across all geographies, which should boost margins. Similarly, natural gas prices in Europe have eased, so the cost is expected to be lower in 2HFY24 vs. 1HFY24.

We marginally increase our FY25 revenue/EBITDA estimates by 5%/4%. The stock is trading at 6x FY25E EV/EBITDA and 1.4x FY25E P/B. We reiterate our Neutral rating on the stock with our SOTP-based target price of ₹115,” the brokerage said.

Also Read: Tata Steel share price closes with 1% gains a day after Q2 results

Disclaimer: The views and recommendations above are those of individual analysts, experts and broking companies, not of Mint. We advise investors to check with certified experts before making any investment decisions.