TATA STEEL: MOVING AHEAD WITH A ‘STEELY RESOLVE
Despite the numerous challenges posed by the pandemic, including a reduction in demand and cash flows, Tata Steel has maintained its leading position and now that the economy is limping back to normal, it is ready to implement new strategies to blow fresh wind into its sails
Tata Steel was established as Asia’s first integrated private steel company in 1907. Today, the company is among leading global steel companies. Tata Steel possesses and operates captive mines that help it maintain cost-competitiveness and production efficiencies through a continuous supply of raw material. During FY20 the consolidated steel production for Tata Steel group was 28.46 million tonnes, recording a 5 per cent increase over that of the previous year. The group recorded total deliveries of 26.68 million tonnes as against 26.80 million tonnes in the previous year. The company operates in India, Europe and Southeast Asia. It has manufacturing units in 26 countries and a commercial presence in over 50 countries. Tata Steel is the second-largest steel producer in Europe. It is a fully integrated company – from mining to manufacturing and marketing of finished products.
The company is engaged in the manufacture and sale of steel products in India and internationally, offering hot and cold rolled coils and sheets, galvanised sheets, tubes, wire rods, construction rebars and bearings. Tata Steel’s operations are grouped under six strategic business units (SBUs), which include bearings’ division, ferroalloys and minerals division, agrico division, Tata growth shop, and wire and tube division. The company has several branded steel products like Tata Steelium, Tata Shaktee, Tata Tiscon, Tata Pipes, Tata Bearings, Tata Structural, Tata Agrico and Tata Wiron. The company is involved in prospecting, discovering and mining iron ore, coal, ferroalloys, and other minerals. The company also offers alumina, dolomite and monolithic refractories as well as silica refractories for coke ovens and the glass industry.
Global Steel Industry
Steel is crucial to the development of any economy and is considered to be the backbone of human civilisation. The level of per capita consumption of steel is treated as an important index of the level of economic development. All major industrial economies are characterised by the existence of a strong steel industry. Global crude steel production in 2019 saw a growth of 3.4 per cent over 2018 to reach 1,869.69 million consumption in infrastructure, manufacturing and equipment sectors. Automotive production trended down across most countries over the second half of 2019. China continued to be the world’s largest steel producer with increase in production by 8.3 per cent to reach 996 million tonnes.
China contributed 53 per cent of the global crude steel production in 2019. In United States, crude steel production went up to 88 million tonnes, recording an increase of 1.5 per cent over 2018, owing to lower global automotive production and prevailing trade tensions. In Japan, steel consumption declined largely due to a slowdown in manufacturing during 2019. In Europe, crude steel production slumped to 159 million tonnes in 2019, recording a decrease of 4.9 per cent over 2018. The decrease was on account of challenges faced with oversupply and trade tensions. In 2019, India became the second-largest crude steel producing country in the world, with crude steel production of 111 million tonnes, an increase of 1.8 per cent over the previous year. Growth in the construction sector weakened due to falling investments in fixed asset formation. A sharp fall in private consumption led to weaker growth in automotive and consumer durables.
Steel Industry in India
India’s economic growth is attached to the growth of the Indian steel industry. Consumption of steel is taken as an indicator of economic development. While steel continues to have a strong presence in traditional sectors such as construction, housing and ground transportation, now special steels are increasingly being used in industries such as power generation, petrochemicals and fertilisers. Demand for steel industry is also derived from sectors like infrastructure, aviation, engineering, construction, automobile, pipes and tubes, etc. India occupies a central position in the global steel industry with the establishment of new state-of-the-art steel mills, continuous modernisation and up-gradation of older plants, acquisition of global-scale capacities by Indian players, backward integration into global raw material sources and improving energy efficiency.
India was the world’s second-largest steel producer in 2019. India surpassed Japan to become the second-largest steel producer in 2019. India’s crude steel production was 111.2 million tonnes. The growth in the Indian steel sector has been driven by domestic availability of raw materials such as iron ore and availability of cost-effective labour. The steel sector has been a major contributor to India’s manufacturing output. India’s per capita consumption of steel grew at a CAGR of 4.43 per cent from 46 kg in FY08 to 74.10 kg in FY19. In FY20, crude steel production and finished steel production in India was 108.5 million tonnes and 101.03 million tonnes, respectively. Export and import of finished steel stood at 8.42 million tonnes and 6.69 million tonnes, respectively, in FY20. The central government has taken various steps to boost the sector, including the introduction of National Steel Policy 2017 and allowing 100 per cent foreign direct investment (FDI) in the steel sector under the automatic route. The steel industry has seen major investments in the recent past. According to the data published by Department for Promotion of Industry and Internal Trade (DPIIT), Indian metallurgical industries attracted FDI of USD 13.40 billion from April 2000–March 2020. The National Steel Policy 2017 aims at increasing the per capita steel consumption to 160 kg by 2030–31. In 2019, the government introduced the Steel Scrap Recycling Policy with an aim to reduce import.
Financial Performance
Looking at the quarterly trends on a consolidated basis, for Q2FY21 the company reported net sales of Rs 36,475.66 crore, an increase of 7.43 per cent as against the net sales of Rs 33,953.75 crore for Q2FY20. For Q2FY21 the company reported an operating profit of Rs 6,332.92 crore – expansion by 58.2 per cent compared to the operating profit of Rs 4,003.11 crore gained in Q2FY20. Tata Steel reported a net profit of Rs 1,591.52 crore in Q2FY21, a decrease of 51.48 per cent as against net profit of Rs 3,279.87 crore gained in Q2FY20. During the quarter, the company witnessed increase in crude steel production by 54 per cent QoQ and 2 per cent YoY to 4.59 million tonnes. All its major sites are now operating at close to full capacity utilisation and downstream operations are back to the pre-pandemic levels.
The company has leveraged its marketing network and strong customer relationships to reach its highest-ever quarterly deliveries of 5.05 million tonnes which translates to 72 per cent QoQ and 22 per cent YoY growth. It reduced exports to 24 per cent of overall deliveries and ramped up domestic deliveries to 3.86 million tonnes which translates to an increase of 164 per cent QoQ and 10 per cent YoY. The company witnessed YoY growth across all key business verticals. The free cash flow generated during the quarter was Rs 7,832 crore. The company has reduced net debt by Rs 8,197 crore during the quarter. On the annual front, in FY20 the company reported net sales of Rs 1,36,976.76 crore, a decrease of 11.45 per cent over net sales of Rs 1,54,691.84 crore reported in FY19. For FY20 its operating profit decreased by 37.32 per cent to Rs 19,306.55 crore from Rs 30,803.92 crore reported in FY19.
Tata Steel reported net profit of Rs 984.49 crore in FY20, which is a contraction by 88.91 per cent compared to the net profit of Rs 8,873.63 crore gained in FY19. The decrease in profit is primarily on account of decline in realisations, lower deliveries, lower finance income, higher finance cost and higher exceptional charges as compared to that of the previous year. Its ferroalloys and mineral division registered lower revenue owing to lower sales of ferrochrome along with decline in prices due to depressed demand in the international markets. The wire and tube division registered lower revenue due to a decrease in realisations and volumes.
During FY20 the cost of materials consumed decreased primarily due to lower cost of imported coal, along with lower consumption of coal. Moreover, the cost of ferroalloys and other raw materials also declined. During FY20 finance costs increased mainly on account of the issue of non-convertible debentures along with higher interest cost on finance. Net finance charges were higher on account of lower interest income on inter-corporate deposits along with lower gain on sale of mutual funds. The net cash generated from operating activities was Rs 13,454 crore as compared to Rs 15,193 crore during the previous year.
Outlook
The pandemic has severely affected economies and industries globally and the steel industry is no exception. Global steel demand is expected to improve gradually. India’s steel demand continues to improve, supported by government spending on infrastructure, festive season and higher rural consumption on the back of good monsoon. Europe’s steel demand is recovering gradually. Re-imposition of lockdowns amid a resurgence of infections poses a key risk. Asian steel prices are expected to remain robust because of steel demand in China. India’s steel prices will remain supported by strong international prices, robust raw material prices, recovery in steel demand and tight supply situation. Seaborne iron ore prices are expected to soften with improvement in supply.
According to the World Steel Association, the impact on steel demand in relation to the expected contraction in GDP may turn out to be less severe than that seen during the erstwhile global financial crisis. Governments of different nations have announced sizeable stimulus packages which are expected to favour steel consumption through investment in infrastructure and other incentives for the steel industry. The demand from infrastructure, construction and real estate sectors is likely to resume in the second half of FY 2020-21. Further, the demand from automobile, white goods and capital goods’ sectors is likely to improve in the near term. Demand for packaging and plating steels used in food products and batteries continues to be strong through the pandemic and the outlook remains strong. Effective government stimulus and return of consumer confidence are likely to be the key drivers for a gradual recovery over the second half of FY 2020-21.
Conclusion
Since India depends largely on migrant labour, restarting construction and infrastructure projects has been a big challenge. The demand from infrastructure, construction and real estate sectors was low in the first half of FY 2020-21 due to the lockdown during the first quarter followed by the monsoon period during the second quarter. India is amongst the fastest growing steel markets in the world. In order to meet the increasing demand, the company has expanded its operations organically and inorganically and is also continuing to strengthen its long products’ portfolio to participate in the growing market. The steel industry is cyclical in nature. In order to insulate revenues from steel cyclicality, Tata Steel is focussing on the branded retail business and downstream product portfolio.
The company believes that this portfolio will provide a significant competitive advantage, contributing up to 20 per cent of revenue going forward. The merger of Tata Metaliks and Indian Steel & Wire Products into Tata Steel Long Products was approved which will create significant synergies and position the company towards future growth in the long products’ segment. The company is placing emphasis on strengthening its financial profile to enable future growth and to achieve volume growth while remaining cost-competitive. The integration and improvement initiatives were undertaken at Tata Steel BSL Limited and Tata Steel Long Products Limited and have helped to unlock synergies and improve cost-competitiveness while enhancing the capacity utilisation of the production units. The company is focusing on driving digital transformation and achieving greater efficiency through ‘One IT’ and an integrated supply chain structure.
It has made progress towards imbibing Industry 4.0 and is the only steel company to have two digital lighthouses, as recognised by the World Economic Forum. Tata Steel has delivered strong results in India with broad-based, marketleading volume growth and strong cash flow generation. The resilience of the company’s business model has enabled it to ramp-up capacity utilisation to normal levels and achieve highest-ever sales despite the ongoing challenges imposed by the pandemic. There has also been a significant improvement in product mix towards domestic sales and higher value-added products and a sharp reduction in costs. Despite the pandemic, Tata Steel has delivered one of the best quarterly results in India in recent times. This was driven by its focus on operating performance and a reduction in cash costs by almost 14 per cent on a quarter-on-quarter basis. Hence, we recommend BUY.