Tata Steel Ltd’s EBITDA declined 32.49% YoY due to higher OPEX
Company Overview:
Tata Steel Ltd, founded in 1907, currently holds the distinction of being the world’s largest steel manufacturer. Operating across the entire steel manufacturing value chain, from mining and processing raw materials like iron ore and coal to the production and distribution of finished goods, Tata Steel has ambitious growth plans. With a current production capacity of 21.6 million tonnes per annum (MnTPA), the company aims to double this figure to 40 MnTPA by 2030. This expansion aligns with its goal of maintaining its global leadership in the steel industry.
Manufacturing Site and Product Portfolio:
Tata Steel’s manufacturing operations are spread across five locations, with Jamshedpur leading the way with an 11 MnTPA capacity, followed by Kalinganagar (3 MnTPA), Meramandali (5.6 MnTPA), Gamharia (1 MnTPA), and another Kalinganagar unit (1 MnTPA). The company boasts a diverse product portfolio, including special steel used in critical applications like automotive components, construction, and capital goods. Additionally, they produce sponge iron/DRI, a key raw material for electric arc and induction furnaces. Tata Steel’s robust global presence is fortified by a vast distributor network of 285, supported by 15,422 dealers, and a workforce of 77,000 employees.
Acquisition of Neelachal Ispat Nigam Limited (NINL):
Tata Steel’s strategic move to acquire a 93.7% stake in NINL for 12,100 crores is a significant development. NINL possesses a 1 MTPA steelmaking capacity, 2,500 acres of land, and substantial iron ore reserves totaling 100 million tonnes. This acquisition positions NINL as a key growth driver, with plans to expand its capacity to 10 MTPA by 2030. To fund this acquisition, Tata Steel has successfully raised 12,700 crores by issuing Non-Convertible Redeemable Preference Shares.
Production and Deliveries: Consolidated
As of June 2023, Tata Steel faced a 7.88% YoY decline in steel production, largely attributed to a slowdown in the European market. The European Central Bank’s 400 bps interest rate hike within the past two months impacted this market negatively. However, India’s steel consumption witnessed an impressive 10% YoY growth in Q1FY24. On the delivery front, Tata Steel saw an 8.76% YoY increase, totaling 7.2 million tonnes.
Valuation and Key Ratios:
Currently, Tata Steel’s stock is trading at a multiple of 76.5x FY23 EPS of 1.33 Rs, with a market price of 128. This contrasts with the industry’s PE ratio of 22.4, indicating a premium valuation. The stock is also trading at 1.52 times its book value of 84.3 per share. In terms of return ratios, Tata Steel reports a moderate ROE of 7.28% and ROCE of 12.6%. The EV/EBITDA ratio stands at 9.43x.
Q1FY24 Results Update: Standalone
In Q1FY24, Tata Steel’s standalone revenue remained stable, with a marginal 1% YoY growth. This stability was influenced by a slowdown in the European market due to a 400 bps rate hike by the ECB in the past 12 months. Conversely, strong steel consumption in India, showing a 10% YoY increase, provided a counterbalance. However, EBITDA faced a significant decline of 32.49% YoY, primarily due to rising raw material costs and operating expenditures. This reduced EBITDA margins by 10% YoY to 20% in Q1FY24. PAT decreased by 30.15% YoY but showed a positive 6.21% QoQ growth, reaching 4,270 crores. The PAT margin also improved by 147 bps QoQ to 13.20%, primarily due to a substantial increase in other income by 146% QoQ. Q1FY24’s EPS stood at 3.49 Rs, marking a 6% QoQ growth compared to the previous quarter.
Conclusions:
Tata Steel, as the world’s largest steel manufacturer, is strategically positioned for future growth with ambitious production expansion plans and acquisitions like NINL. While facing challenges in the European market, the company benefits from strong steel consumption in India. Its premium valuation, moderate return ratios, and evolving financial performance in Q1FY24 suggest a mixed outlook. Maintaining a keen eye on market dynamics and cost management will be crucial for Tata Steel’s continued success in a competitive global steel industry.
