Tata Steel expects recovery in the second half of the fiscal

Weak demand and high debt could put severe pressure on Tata Steel’s balance sheet in the coming quarters. Although the company’s March quarter performance was better than the street’s expectations, the June and the September quarter are expected to be hit by weak demand. The company has started to conserve cash by deferring payment, squeezing expenses and curtailing capital expenditure, said the management on the call with the analysts.

“Based on an initial assessment, the outlook for the UK operation is expected to be adversely impacted with respect to its ability to continue as a going concern and meet its liquidity requirements,” said the company in its press release.

A sharp fall in the operating margin before depreciation and amortisation (EBITDA) has escalated the company’s debt burden. EBITDA fell by 44% to Rs 17,060 crore in FY20 thereby pushing debt-EBITDA ratio to six. This may worsen in the current fiscal given the possibility of sharp fall in profits.

Given the subdued domestic demand, the company has increased exports, which fetch lower margin. According to the management, exports will be 50% of the total revenue in the first quarter of the current fiscal and 30% in the second quarter and eventually fall to 10-15% once the domestic demand improves. Export margins are lower compared with the domestic business given minimum import prices (MIP) in India. Most of the export orders are from China and South East Asia said the company. Realizations in these markets are not as strong.

The company expects a 16% drop in the European demand for FY21. As a result, the impact on the European business is even higher. The company is in talks with the UK and Netherland governments to seek support.

In the March quarter, production improved by 5% to 7.4 million tonnes but deliveries fell by 11% to 6.5 million tonnes. Lower deliveries and realizations resulted in a 20% decline in revenues at Rs 33,770 crore. The management expects sales volume for FY21 to remain the same as in FY20 with things picking up from the second half of the current fiscal.

The stock has lost nearly 36% over the past year but its valuation still remains elevated. At Tuesday’s closing stock price of Rs 326.7 on the BSE, the company’s enterprise value (EV) relative to EBITDA was at a five-year high of eight.