Tata Steel may post strong fourth-quarter earnings on the back of volume growth in both domestic and European operations. Operational profits from these two key geographies are also likely to improve in fourth quarter, analysts said.
Tata Steel's consolidated net profit in January-March, according to Bloomberg, is seen growing 89% sequentially to Rs 947 crore on higher growth in revenue. The company has posted a loss of Rs 6,668 crore in the year-ago period. Consolidated revenue for the quarter is seen at Rs Rs 40,639 crore, up 11.6% sequentially and 18.9% on year due to higher volumes across operations and better realisations.
"We expect Tata Steel to report 30% year-on-year (yoy) growth in consolidated net profit mainly led by improvement in Corus's performance," CLSA said in an earnings preview report. Angel Broking, on the other hand, expects 24.3% yoy improvement in consolidated net profit.
The Tata Group company's crude steel production grew 8% on-year to 2.48 million tonne (mt), while its sales rose 7% on year to 2.43 mt. For the fiscal 2014, the company for the first time reported a record volume of crude steel production at 9.15 mt as compared with 8.13 mt, while sales rose to 8.52 mt against 7.48 mt in fiscal 2013. Its annual sales volume were 8.52 mt against the previous best of 7.48 mt in fiscal 2013.
Most analysts expects European volumes to increase by whooping 16-20% sequentially to 3.9-4 mt from 3.2 mt in third quarter due to strong seasonal demand.
"European volumes are likely to increase in the fourth quarter as two of the company's blast furnaces which were under maintenance are now fully operational, one of which includes Port Talbot," Giriraj Daga, senior analyst with Nirmal Bang Securities, said.
Higher volumes would also push the company's realisation per tonne. "In Tata Europe (TSE), we forecast Ebitda to increase 32% quarter on quarter in fourth quarter, led by higher volume and lower costs," Bank of America Merrill Lynch (BoA-ML) said in a report.
"Europe operations' Ebitda per tonne is expected to come at around $35 and could even go up to $40. ArcellorMittal's results recently showed improvement in realisation, which may also apply to Tata Steel's Europe operations," Gautam Chakroborthy, senior analyst with Emkay Global Financial Services said.
The company's European operations have shown steady improvement over the last year. "Things are turning sure for better and the company should be able to maintain Ebitda per tonne at $35-$40 per tonne going forward," Daga said.
European operations have been under a tight squeeze after the Lehman crisis and the European debt turmoil. The erstwhile Corus has gone through many restructuring programmes over the past three years involving job cuts across facilities in the UK to maintain competitiveness, as steel demand in Europe stayed soft.
Indian operations of the steelmaker are also likely to report robust operational performance. Most analyst expect Ebitda per tonne Rs 14,500-14,700 from Rs 14300 in the previous quarter following better volumes and hike in prices.
"In India, we expect Ebitda to increase 15% qoq led by a) 10% qoq increase in volume and b) 2% qoq increase in ASP. We forecast steel Ebidta/tonne of Rs14,900 in March quarter (Rs14,035 in December quarter)," Bank of America-Merrill Lynch said in a report.
The company has taken an average price rise of Rs 500-Rs 700 per tonne sequentially, Daga said.
While Tata Steel Indian and Europe operations continue to improve, higher net debt has been one of the key concerns among investors. The steelmaker which has 10 mt facility in Jamshedpur had a net debt of whopping Rs 70,000 crore in the December quarter.
"Net debt level had risen sharply in the third quarter. With liquidation of inventories, net-debt level is expected to decline. TSE was expected to liquidate inventories, with 17% yoy growth in sales volumes to 4 mt," Motilal Oswal said in a report.
"If debt reduces in the March quarter it would be positive for the company, but if it does not even improvement in Europe operations would be eclipsed," Chakroborthy said. Tata Steel would be making Rs 9,000 crore capital expenditure for Kalinganagar plant, post which it is likely to go for two year capex holiday, which would help the company to bring down debt. "Its standalone cash generation is decent. And fiscal 2016 onwards there would be enough cash left with company to pay back debts," Daga said.