Tata Steel investors may remain jittery amid delayed revival in European operations

The September quarter (Q2FY25) earnings of Tata Steel Ltd had its share of positives even as European operations remain a drag. Consolidated Ebitda of ₹5,522 crore adjusted for forex translation, rose 33% year-on-year. 

Profitability improved despite a drop in realization. It was aided by a sharp decline in raw material prices as well as higher volumes. Ebitda is earnings before interest, tax, depreciation and amortization.

On a standalone basis (domestic operations), Ebitda fell 4.3% year-on-year to ₹6,734 crore, primarily impacted by lower steel realizations. Realization during the quarter was lower because of a significant increase in exports from China. Even so, its domestic operations are on relatively decent footing, while losses in the UK remain a niggling worry for investors.

In Q2FY25, UK business remained in the red with Ebitda loss of ₹1,589 crore, increasing from ₹1,367 crore in the same quarter last year. The company’s UK business is going through a structural shift necessitated by a high-cost operating structure and stringent environment regulations. The last blast furnace at the facility was shut down during the quarter and the process of building an electric arc furnace-based steel making has been started.

The company has signed the final agreement with the UK government which would provide £500 million out of the total project cost of £1,250 million. It is also in the process of bringing down its headcount, made redundant with the closure, involving a separation cost of about £150 million. The company would be saving about £100 per tonne from lower labour cost and other overheads after the process is completed by June, the management said. 

Overall, the management anticipates Ebitda losses from the UK operations to start reducing from Q3FY25 onward. This, along with capacity ramp-up in the Netherlands and favorable market conditions, should boost the overall Ebitda performance of its European operations. 

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Tata Steel Netherlands reported an Ebitda of ₹243 crore in Q2FY25 from a loss of Rs1,145 crore. While the Netherlands operations remain profitable, the profitability has been affected by higher carbon tax. Tata Steel has submitted a proposal to the Netherlands government for support similar to the one agreed upon with the UK government.

The positives

On the bright side, domestic demand is expected to improve in second half of FY25, with rising government spending and construction activities. Plus, domestic expansion projects remain on track. It commissioned its blast furnace at Kalinganagar and expects it to reach full capacity by Q4. 

The company expects to produce an additional 1.1 million tonnes from the facility during FY25, going up to 3.5-4mtpa in FY26 and 5mtpa by FY27. Mtpa is million tonnes per annum. 

The blast furnace along with a series of downstream facilities, the last one to be commissioned by June, would significantly enhance the share of value-added grades in its portfolio. The management indicated that the cost of production from this location would be lower by about ₹3,000-4,000 per tonne because of lower power consumption and reduced overheads.

However, the mood is downbeat currently. In this financial year so far, the Tata Steel stock has fallen 8%, underperforming thebenchmark index Nifty50. Investors’ sentiment is weighed down by the losses incurred in the UK, while a revival is awaited. 

“Expectations of a breakeven in UK operations in Q3FY25 have been delayed to Q1FY26 now. Furthermore, an earnings recovery at the Netherlands operation too has been pushed to FY26. In India, lower steel prices in Q3FY25 shall further affect Ebitda/tonne,” cautioned Nuvama Research in a report on 7 November. The brokerage has reduced its FY25 and FY26 EBITDA estimates by 30% and 7%, respectively, to factor in lower steel prices and higher losses in Europe. 

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