Tata Steel Q2 Review: U.K. Restructuring Positive Over Long Term, Say Analysts

Tata Steel Ltd.'s impairment of assets in the U.K. was not a surprise with the restructuring of the operations being a positive in the long term, according to analysts.

However, they expressed concern for the short term over weak steel prices extending losses for Tata Steel Europe in the upcoming quarters.

Higher coking coal price may add to the pressure, but expectation of stronger domestic prices may offset higher costs for the second half of the current fiscal.

Tata Steel Q2 FY24 Earnings Highlights (Consolidated, YoY)

• Revenue down 7.01% at Rs 55,682 crore (Bloomberg estimate: Rs 55,982.1 crore).

• Ebitda down 29.6% at Rs 4,268 crore (Bloomberg estimate: Rs 4,957 crore).

• Ebitda margin at 7.66% vs 10.12% (Bloomberg estimate: 8.9%).

• Reported loss of Rs 6,511.2 crore vs profit of Rs 1,297 crore (Bloomberg estimate: Rs 440.7 crore profit).

U.K. Restructuring And Impairment

"The restructuring was expected," Rakesh Arora, managing partner at Go India Advisors, said.

The existing assets were approaching their end of life and they had low operational efficiency, according to Amit Dixit of ICICI Securities.

Majority of the impairment and restructuring costs relate to the decarbonisation project being undertaken in the U.K.. The company is undertaking a £1.25-billion investment with the U.K. government to set up a 3-million-tonne electric arc furnace at its Port Talbot facility.

Accordingly, Tata Steel incurred impairment and restructuring costs of over Rs 6,200 crore for its consolidated operations and an impairment charge of over Rs 12,500 crore on loans to European operations to its standalone books.

The new electric arc furnace that will replace the carbon-intensive assets will result in cost savings of £150 per tonne in the long term, Dixit said.

"The positives from this would emerge in three years. It's a good thing that it is out of the way now," Arora said.

Tata Steel may continue face some "hiccups" along the way in the short term, according to Dixit. However, "In our view, it's a short-time pain versus long-term gain."

"Overall, this doesn't change anything since the Street wasn't expecting a high value for European assets and these provisions are a sign that valuation for European assets is much lower than what's in their books," Arora said.

Analysts On Earnings Outlook

The situation has worsened for the third quarter as coking coal prices have jumped from $230 per tonne to $330 per tonne. Iron ore prices have also risen to $130 per tonne from $100 levels, according to Arora.

In Europe, stagnant demand is leading to weaker steel prices, which could lead to more losses for Tata Steel Europe," Arora said. "Overall, things are looking bleak from an earnings points of view. Consensus Ebitda estimates must be cut by 20-25% for FY24."

Steel prices are at unsustainable levels, and they may be bottoming around the world. Ebitda per tonne would likely remain stable or may improve if the steel prices go up, according to Dixit.

Dixit said there is a good likelihood of steel prices going up after Deepavali. Imports into India may moderate as the Bureau of Indian Standards' certification of many of the exporters had not being renewed since April this year.

This may boost domestic prices as the country enters a seasonally strong phase, higher steel prices likely to offset higher coking coal prices, he said. "No doubt that steel companies will be able to improve their profitability from here on."

Shares of Tata Steel were trading 0.99% higher at Rs 117.75 apiece compared with a 0.66% gain in the benchmark NSE Nifty 50 at 2.35 p.m.