Why is Tata Steel share up despite weak earnings?

Shares of Tata Steel rose over 1% in opening trade on Tuesday, in an otherwise weak broader market, even after the country’s largest steel maker reported a drop in its profit, but managed to beat analysts’ estimates. The Tata group company posted a 13% decline in its quarterly profit due to higher input costs and tax expenses, but better price realisations in India and a strong performance by Europe business boosted revenue.

Tata Steel share price has been rising for the last seven sessions and has surged more than 9% during this period. Extending its gaining streak, the index heavyweight opened higher at ₹969, against the previous closing price of ₹960.90 on the BSE. In the first hour of the trade so far, the largecap stock gained as much as 1.4% to ₹974, compared to a 0.7% fall in BSE benchmark Sensex.

In a post market release on Monday, Tata Steel said it has posted a consolidated net profit (attributable to the owners of the company) at ₹7,765 crore for the quarter ended June 30, 2022, down 12.8% from ₹8,907 crore in the year-ago period. Sequentially, the net profit dropped 20.4% from ₹9,756 crore in the January– March quarter of 2022.

The consolidated revenues increased 18.6% to ₹63,430 crore in Q1FY23, compared to ₹53,465 crore in the corresponding period last year. On a quarter-on-quarter basis, the consolidated revenues fell 8.5% from ₹69,324 crore during the previous quarter. On the operating front, EBITDA dropped 7% to ₹15,047 crore in Q1FY23. On a QoQ basis, EBITDA margin improved to 24%, while EBITDA per ton increased by ₹3,780 to ₹22,717.

During the quarter under review, raw material costs increased to ₹31,319 crore from ₹19,956 crore in the year-ago period due to higher coking coal consumption cost.

Region-wise, India business reported a 2% YoY drop in deliveries due to moderation in exports following the imposition of 15% export duty by the government. The EBITDA of Tata Steel India stood at ₹9,582 crore, which translates to an EBITDA per ton of ₹23,557.

For Europe, the company achieved “highest-ever” quarterly EBITDA at £621 million, which translates to an EBITDA per ton of £290.

Commenting on Q1 earnings, T V Narendran, Chief Executive Officer & Managing Director, says, “This has been a challenging quarter for the Global and Indian economy with rising interest rates, supply chain constraints and slowdown in China due to Covid, but despite these multiple headwinds, Tata Steel has delivered a strong performance with an improvement in margins.”

“Our strong marketing franchise and superior business model in India enabled us to successfully pivot and increase our domestic deliveries to counter the 15 percent duty imposed on steel exports in the middle of the quarter and we continue to drive value accretive growth in India backed by investments in customer relationships, brands and distribution networks and remain well positioned to benefit from the buoyant automotive & retail housing demand and the government spend on infrastructure”, he added.

Going ahead, the company expects that volatility in terms of steel price and input cost movement to continue in the next quarter but the spreads are likely to stabilise in the second half of the year. “The volatility in commodity prices and immediate impact of the export duty in India have led to an increase in working capital but our cost improvement and other initiatives along with expected pickup in demand in the second half of the year should result in normalisation of working capital,” the management said.

As of June 2022, Tata Steel’s net debt stood at ₹54,504 crore, while the company remained committed to its annual deleveraging target of $1 billion in line with its capital allocation strategy to reduce the debt.