The Tata Steel Ltd. logo sits on a flags flying outside the Tata Steel Ijmuiden BV plant in Ijmuiden, Netherlands. (Photographer: Jasper Juinen/Bloomberg)

Tata Steel’s Domestic Business Lifts Q3 Earnings; Brokerages Remain Cautious  

Tata Steel Ltd. rallied as much as 3 percent after the company returned to profitability after four consecutive quarters of losses. The turnaround was driven by its Indian operations posting profits in the third quarter, a first for the steel producer in last five quarters.

Entire surprise came from standalone business (lower raw material cost, higher volumes and better performance of ferro alloy) partially negated by subdued performance of Europe business.
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Resurgence Of Domestic Business

Profit after tax from standalone operations, which reflects its business in India, stood at Rs 1,204.6 crore, rising from Rs 298.4 crore in the corresponding quarter last year. Sales rose by 39 percent, compared to last year to come in at Rs 14,106 crore supported by higher realisations and strong growth in deliveries after production was ramped up at its Kalinganagar plant.

Tata Steel India has been able to partially avoid a spike in coking coal costs by increasing sourcing of domestic coal. The major impact of rising coking coal prices will be realised mainly in the fourth quarter as the management expects cost to increase by around $40-50 per tonne in India.

The homegrown company earnings was also boosted by higher chrome ore sales from Sukinda mine. Earnings before interest and tax (EBIT) from chrome business increased by 83 percent, compared to last quarter to Rs 320 crore on higher prices.

Currently, the steel major is optimising volumes from its Sukinda mines by contracting with local convertors. Going forward, it said it will participate in the 2020 auction as the licence for Sukinda mines would expire.

The management said that the impact of demonetisation, which was at its peak in November, eased significantly in December. It said cash crunch faced by unorganised players led to a decline in demand as well as supply. This helped organised companies like Tata Steel sell more volumes.

A delay in regulatory approval for raw material projects was highlighted as the reason for the company's capex being lower than the full-year guidance of Rs 9,000 crore. The figure for the nine-month period stood at Rs 5,600 crore.

European Operations Outlook

European operations remained subdued due to higher costs and planned maintenance shutdowns in the month of November and December.

Raw material and energy cost remained at elevated level during the third quarter. The management also updated about operations in its Port Talbot plant which is now producing 3.4 million tonne as against 4.5 million tonne in previous year.

The company attributed the positive EBIT in its European business due to a 'more competitive Pound, a lower cost base in the U.K. and more favourable market conditions.'

Going forward, the company expects European steel demand is expected to remain stable.

European Pension Plan

The company aims to close the 15 billion pound British Steel Pension Scheme (BSPS) for future contributions before a possible 60 million pound payment deadline on March 31, 2017, in order to plug the mounting deficit.

The ballot process for the same, which is currently in progress, is likely to close in 10 days. If successful, it will be followed by discussion with the fund trustees. Discussion with the regulators will be the final process. The entire process could take a couple of months, the management added.

Positive developments on restructuring of the British Steel Pension Scheme and the European steel operations would lead to a further improvement in sentiment. 
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Brokerages ‘Cautiously Optimistic’

Prabhudas Lilladher upgraded the stock to ‘accumulate’ from its earlier ‘reduce’ rating. It has also increased its price target by 44 percent to Rs 540.

Most of the other brokerages have maintained their ratings on the stock but have hiked their target price on Tata Steel. Motilal Oswal upgraded the target price by 25 percent to Rs 401 per share, while other brokerages upgraded it in the range of 8 percent to 21 percent.

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