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Tata Steel- Supercycle or Business Cycle Q1FY22 Result Analysis and Earnings Call Highlights

Tata Steel- Supercycle or Business Cycle Q1FY22 Result Analysis and Earnings Call Highlights

Published on 23 August 2021 Views 58 Comments 0

Q1FY22 Result Analysis

Q1FY22 Result:

  • The production of the company for the Q1FY22 stood at 7.88 million tonnes against 5.54 million tonnes in Q1FY21 and 8.02 million tonnes in Q4FY21 amounting to a growth of 42.24% YoY and a drop of 1.75% QoQ.
  • The Deliverers of the products were 7.11 million tonnes in Q1FY22 against 5.34 million tonnes in Q1FY21 and 7.83 million tonnes in Q4FY21 amounting to a rise of 33.15% YoY and a fall of 9.20% QoQ.
  • Tata Steel has recorded revenue of Rs. 53,372 Cr. in the quarter ended 30th June 2021 against Rs. 25,475 Cr. in the quarter ended 30th June 2020 up by 109.5% YoY. Sequentially, the revenue has increased by 6.8% from Rs. 49,977 Cr. in the quarter ended 31st March 2021.
  • The Earnings before Interest, Taxes, Depreciation, and Amortisation (EBITDA) of the company has increased drastically from Rs. 630 Cr. in Q1FY21 to Rs. 16,185 Cr. in Q1FY22 amounting to the phenomenal growth of 2,469% YoY. Quarter on Quarter, the EBITDA of the company increased by 6.8% from Rs. 14,290 Cr. in Q4FY21.
  • The EBITDA margin stood at 22.27% in the first quarter of FY22 expanded by 2,785 bps YoY and 173 bps QoQ.
  • The EBITDA Per Ton is currently at Rs. 22,279 for Q1FY22.
  • The finance Cost of the company is down by 9.72% YoY and 2.55% QoQ to Rs. 1,811 Cr. in Q1FY22.
  • The company reported a Net Profit of Rs. 9,768 Cr. in the quarter ended 30th June 2021 against the loss of Rs. 4,648 Cr. in the quarter ended 30th June 2020. Sequentially the net profit figure has increased by 36.4% QoQ from Rs. 7,162 Cr. in Q4FY21.
  • The Net Profit Margin stood at 18.3% in Q1FY22.

Tata Steel- Q1FY22 Performance

Tata Steel- Q1FY22 Performance

Key Drivers:

  • Revenues improved across key entities with an increase in realization and were partially offset by lower deliveries.
  • Raw Material cost increased primarily due to an increase in purchased Iron Ore and Coal consumption cost with higher prices.
  • Inventory value increased with higher prices and lower deliveries. Employee benefit expenses increased primarily with annual increments across key entities.
  • Volumes production QoQ on declined slightly while deliveries declined by 9%.

Key Metrics:

  • The EBITDA margin of the company is on a rising trend from 17.2% in FY18 to 19.8% in FY21 and 30.3% in Q1FY22.
  • The EBITDA per tonne of the company has increased drastically for the company in the last 4 financial years from Rs. 9,337 Rs. In FY18 to Rs. 10,838 in FY21, and finally Rs. 22,779 in Q1FY22.
  • The Net Debt of Tata Steel has come down to Rs. 73,973 Cr. in Q1FY22 against the highs of Rs. 1,04,779 Cr. in FY20.
  • The Interest Coverage Ratio of the company has also expanded very well for the company in the past years. The Interest Coverage Ratio stood at 3.9 in FY18 which has now nearly tripled and is currently at 8.9 as of 30th June 2021.
  • The Other Key Metrics of the company are provided in the image attached below:

Tata Steel- Key Metrics

Tata Steel- Key Metrics

Business Outlook:

i) Steel Demand:

  • Global steel demand is expected to expand by 5.8% in CY21 with recovering economy and progressive COVID-19 vaccination across regions
  • India steel demand is expected to improve with the waning 2nd wave of COVID-19.

ii) Steel Prices:

  • Asian steel prices are expected to remain elevated amidst supply tightness with strong demand recovery, and stricter production curbs, and high coking coal prices in China.
  • Indian steel prices remain strong in line with international prices, robust demand in India, and high raw material prices.

iii) Raw Material Prices:

  • Seaborne iron ore prices are expected to witness pressure with softness in demand from China coupled with improving supply from Australia and Brazil
  • Coking coal prices are expected to remain rangebound with the likely continuation of the geopolitical conflict between China and Australia, and higher demand from the World-ex China region.

Valuations:

  • Tata Steel stock is currently trading at a PE Ratio of 8.45 which is high above the Median PE of the last 5 years, but trading at a discount valuation while comparing to the Median PE of the last 3 years.
  • Tata Steel is the second-best company in terms of PE among its peers. The company with the most attractive PE ratio is SAIL of 5.97. APL Apollo Tubes has the highest PE Ratio of 40.9.

Tata Steel- Valuation

Tata Steel- Valuation

Margin Performance:

  • The Operating Profit Margin (OPM) of the company stood at 30.49% which is highest in the last 4 quarters.
  • The Profit After Tax Margin (PATM) also reached the higher levels of 18.07% in Q1FY22.
  • The comparison of OPM and PATM of the company with the other peers are provided in the image attached below:

Tata Steel- Margin Performance

Tata Steel- Margin Performance

Earnings Call Highlights:

  • The company has accelerated CAPEX allocation for the 6 MTPA pellet plant and the CRM complex. Both are expected to be commissioned by the first half of 2022.
  • The working capital witnessed in Q1FY22 is expected to witness an unwinding trend over the coming quarters.
  • Gross debt declined to 84237 crores with debt repayment of 5894 crores. Net debt declined by 1416 crore QoQ and was at 73973 crores at the end of June 2021.
  • The company is committed to deleveraging further and expects to bring down the debt significantly by the end of the current financial year
  • For FY22E, Indian operations steel volumes are expected to be higher by 1 million tonnes (MT) compared to FY21 (FY21 Indian operations steel sales volume was at 17.3 MT).
  • For Q2FY22E, for Indian operations blended steel realizations are expected to be higher by 3000/tonne compared to Q1FY22. For Q2FY22, coking coal cost is expected to be US$20/tonne higher compared to Q1FY22
  • For Q2FY22E, for Tata Steel European operations, realizations are expected to increase by €200-250/tonne QoQ (compared to Q1FY22). This is since a substantial number of contracts were renegotiated in July 2021
  • TSL spent 2011 crore on CAPEX in Q1FY22. Work on the pellet plant, cold roll mill complex, and the 5 MTPA expansion at Kalinganagar is ongoing.

Tata Steel- Is it Supercycle or Business Cycle:

The Management of Tata Steel is very bullish on Steel Sector. The Management has laid out several reasons in favor of the growth of Steel Sector which is as follows:

1) Megatrends in Urbanisation:

  • Rising Urban Population over last few decades due to shifting from Rural Areas to Urban Areas.
  • Strong upliftment in Government’s Investment in Infrastructure to cater growing Urban Population.
  • And for Infrastructure Development, Steel is required.

2) Shifting of Economic Power from West to East:

  • Strong Economic Growth Outlook in Emerging Asian Countries.
  • Higher GDP Growth Rates witnessed in Developing Emerging Economies
  • Rising Capital Infusion for development in Emerging Economies.
  • And hence for Infrastructure Development and Other Facilities, Steel plays a crucial role.

3) Demographic Change:

  • India is having a strong Demographic Dividend.
  • Around 65% of the population is less than 35 years.
  • Aspirational Crowd is higher in India not only regarding consumption but also towards Infrastructure facilities, Jobs, etc.
  • Demographic Dividend in emerging economies will play a crucial role.

4) Climate Change:

  • Corporate’s focus on Decarbonisation and Technology
  • Example: New Emissions Norms in Auto Sector
  • The considerably high requirement from Steel Sector.

2 Key Reasons of Super-Cycle in Steel Sector:

i) Pent-up Demand:

  • Strong Uplift in Demand post COVID recovery

ii) Supply Constraint:

  • Due to high pent-up demand, there was a situation of Limited Supply, which ultimately led to Rising Inflation in the Steel Sector.

Risk Ahead:

  • China, which was the largest exporter of Steel in the past years has turned to net imported steel in the previous financial years. And thereby, there is a risk on this growth of Steel Sector, if China again turns out to be a Net Exporter of Steel in future.
  • The Current Cycle in Steel seems more to be a Business Cycle rather than a Super Cycle because there is not such an exceptional move taking place which supports Super Cycle in the Steel Sector.
  • Due to this exciting journey, the steel companies may also overcommit the debt portion, which can lead to a high debt situation in the future which can be scary.

Conclusion:

An investor should only invest in Steel Sector if one very well understands the Steel Cycle. If not, one should avoid investing in this sector. Consult a financial advisor before making any investment strategy.

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