Tata Steel Ltd could have shown a significant, but non-cash bump in its September quarter (Q2) profits because of the revaluation of Tata Steel Europe’s pension scheme liabilities. Its success in renegotiating the terms of these schemes led to a credit of Rs.9,683 crore. But it chose to write down its European assets, to reflect deteriorated steel market conditions. That led to a non-cash charge of Rs.8,669 crore.
While the net impact is positive, the unpleasant reality is the difficult position of its European business. It reported an underlying loss at the Ebitda level of Rs.139 crore compared with a profit of Rs.575 crore in the previous quarter. Ebitda, or operating profit, stands for earnings before interest, taxes, depreciation and amortization.
On a sequential basis, in Europe, volume sales declined, realizations declined, and while raw material costs fell, it was not enough to bolster profits. The flooding of surplus Chinese steel into world markets has hit prices hard, especially in Europe. Tata Steel’s UK operations have been further hit, because its underlying costs are higher (compared with its Dutch operations) and the strong pound made things worse.
India, its other major market, did better in comparison. Volume sales rose by 8.9%, but on the negative side, realizations fell while raw material costs rose. Still, India’s underlying Ebitda rose from Rs.1,771 crore to Rs.1,963 crore sequentially, but the September quarter also included aRs.377 crore write-back of excess provisions made earlier for the District Mineral Foundation fund. But for that, it would have declined a bit.
At the group level, Tata Steel’s net sales declined by 2.8% sequentially to Rs.29,069 crore and operating profit declined by 34% to Rs.1,830.5 crore. Interest costs are stable. Net profit doubled to Rs.1,529 crore, but mainly attributable to income from sale of investments.
The outlook continues to be mostly bleak. Demand continues to be weak globally although India is relatively better off. Some relief can be expected in India from lower raw material costs, as captive sourcing increases. But steel prices are a bigger problem. Duty hikes are of little help. The management said Chinese hot rolled coils were quoting at $380 per tonne when the demand (for higher duties) was made, fell to $340 per tonne by the time the safeguard duty was announced, and are now quoting at $280 per tonne.
Tata Steel’s share has fallen by 53% in the past year. Till China finds a solution to all the excess steel that is spilling into global markets, the pain for steel companies will continue. In Tata Steel’s case, the one bright spot could be if there is a sustained revival in domestic demand. At least, that will lead to higher volume growth.
Source: http://www.livemint.com/