Tata Steel envisages a challenging trajectory over the coming three fiscal years as it propels forward with restructuring initiatives across its UK operations, signifying an ardent focus on reinforcing its market positioning amidst formidable economic headwinds.
Tata Steel’s Diverse Fortunes in a Shifting Global Market
Tata Steel, a major player in India’s infrastructure boom, has seen strong demand for steel within the country. However, on the global stage, the scenario is less favorable, particularly with its European operations facing losses. The company’s Q3FY24 performance in India has provided a vital cushion for its struggling European ventures, setting the stage for potential future growth.
Revamping the UK Operations
Amidst the challenges, Tata Steel is undertaking a significant transformation at its Port Talbot facility in the UK. The shift from traditional blast furnaces to low-carbon emitting electric-arc-furnaces comes with hefty costs and complex negotiations with unions to secure settlements for impacted workers. With the old furnaces scheduled for decommissioning after September 2025, production has been affected, and the full recovery is not expected until FY27, leading to financial pressures.
European Prospects and Global Pressures
Meanwhile, in the Netherlands, the imminent completion of maintenance for blast furnace 6 (BF6) promises a production boost for the European operations, at least for the interim period before the UK shutdown. However, the company is bracing for a potential decline in average selling prices in the European Union, which could dampen the benefits of any upturn in UK prices.
On the global front, soft demand and surging exports from China continue to exert downward pressure on steel prices. China, commanding more than half of the global production capacity, has been exporting 7-8 million tonnes monthly during Q3FY24. The further escalation of Chinese exports could exacerbate the global price decline.
Factors to Monitor
The impetus in China’s steel production and exports remains a pivotal factor, with the efficacy of successive stimulus packages dictating its impact on global steel prices. If these packages effectively increase domestic demand in China, it could absorb more of the steel production, thereby curbing exports and potentially stabilizing global prices.
Tata Steel’s Performance in Q3FY24
For Q3FY24, Tata Steel’s standalone revenue witnessed a 2% rise to ₹34,700 crore, in line with market consensus. Despite a drop in standalone average selling price, earnings before interest, taxes, depreciation, and amortization (Ebitda) surged 61% year-on-year to ₹8,200 crore, reflecting reduced raw material costs.
Strong Financial Performance
Adjusted net profit soared 96% on year to ₹4,600 crore, surpassing estimates, with the company achieving its best-ever Q3 sales at 4.9 million tonnes, a 6% year-on-year increase. Domestic crude steel production, including Indian subsidiaries, also registered a 6% year-on-year rise to 5.3 million tonnes.
Consolidated Financials and Debt Management
Consolidated revenue dipped 3% year-on-year to ₹55,300 crore, attributed to lower blended average selling prices globally and domestically. However, consolidated Ebitda jumped 55% on year at ₹6,300 crore, driven by India performance, with Europe reporting an Ebitda loss of ₹2,900 crore.
Furthermore, despite the prevailing stress, Tata Steel managed to pay down debt, with gross debt declining sequentially to ₹88,200 crore and net debt at ₹77,400 crore, alongside a cash liquidity of ₹23,300 crore. Consolidated cash flow was lower at ₹7,879 crore in Q3FY24, with net debt-to-Ebitda ratios at 3.23 times and the net debt-to-equity standing at 0.78 times.
Anticipated Challenges and Future Endeavors
The company anticipates a $10/tonne increase in coking coal costs and a potential ₹1,000/tonne decrease in India realizations for Q4FY24. The Netherlands production is expected to rise with the restart of BF6, while the Kaliganganagar facility in Odisha is set to add 0.7 million tonnes of volumes in FY25, ramping up to 5 million tonne per annum (MTPA) capacity in FY26.
Long-term Vision and Structural Transition
Tata Steel aims for higher EU realizations and volumes as BF6 comes online, with Kaliganganagar contributing to India’s capacity. The company’s long-term target is a 40 MTPA capacity and aims to achieve carbon neutrality by around 2045. However, the next three fiscal years will pose challenges as the company undertakes restructuring of its UK operations, with potential alleviation from a boost in the global economic cycle.
Tata Steel’s divergent performance in India and Europe reflects the complexities of navigating the global steel market. While the company’s Indian operations demonstrate resilience, its European endeavors face multifaceted challenges. The ongoing transformation in the UK and the dynamics of global steel prices underscore the intricacies at play, making Tata Steel’s journey an intriguing one to observe in the coming months.
