Tata Steel Shares Fall Even As Analysts Stay Positive Despite Surprise Loss
Tata Steel reported a consolidated net loss in Q3 on higher material costs and a deferred tax expense.
Shares of Tata Steel Ltd. fell even as most analysts retained their ratings on the stock after the company's reported a surprise loss in the third quarter.
The Indian steelmaker's reported a consolidated net loss of Rs 2,223.8 crore in three months ended December compared with a profit of Rs 9,572.6 crore a year earlier. Analysts tracked by Bloomberg had estimated a net profit of Rs 1,699.05 crore.
The loss came as the company faced a deferred tax outgo of Rs 2,149.9 crore. Material costs for the quarter rose to Rs 24,695.3 crore from Rs 20,546.5 crore a year earlier. The European business earnings also missed estimates.
Tata Steel Q3 FY23 (Consolidated, YoY)
Revenue down 5.73% at Rs 57,354.1 crore (Bloomberg estimate: Rs 56,689.9 crore).
Ebitda was down 72.93% at Rs 4,318.4 crore (Bloomberg estimate: Rs 5,958.7 crore).
Ebitda margin at 7.53% vs. 26.22% (Bloomberg estimate: 10.5%).
Net loss of Rs 2,223.8 crore vs. a net profit of Rs 9,572.6 crore (Bloomberg estimate: Rs 1,699.0 crore profit).
Shares of Tata Steel were trading 5.7% lower as of 1:20 p.m.
Total traded volume stood at 2.1 times its 30-day average. The relative strength index at 14 implies that the stock may be oversold.
Out of the 33 analysts tracking the company, 24 maintain a 'buy' rating, six recommend a 'hold,' and three suggest to 'sell' the stock.
The return potential, as calculated by the consensus of analyst estimates, stands at 9.8% over the next 12 months.
Here's what analysts have to say about the Tata Steel
Morgan Stanley
Maintains an 'equalweight' rating with a target price of Rs 110, suggesting a 6% upside or downside from the target.
Brokerage terms Europe business as "a big drag" on the third-quarter results of the ongoing fiscal.
Standalone Ebitda of Rs 5,160 crore was 5% below the brokerage's estimates and 15% below the consensus analyst estimates. Ebitda miss was mainly led by higher operational expenditures, however, partially offset by better revenues.
Consolidated Ebitda was at Rs 4,318.4 crore, 4% above the brokerage's estimates but 32% below consensus analyst estimates. It was impacted by the Europe business, which reported a greater Ebitda loss than the brokerage expected.
The company's net loss of Rs 2,223.8 crore was partly led by a non-cash deferred tax expense of Rs 2,150 crore, mainly relating to movements in the British Steel Pension Scheme, which accounted for Rs 1,780 crore.
As per the brokerage, higher bear case weighting reflects unfavorable demand and supply, along with an unfavorable steel price outlook in the medium term.
The brokerage also sees a lower probability of an improved macroeconomic environment supporting volumes and prices.
Risks to upside
Improvement in Indian steel demand growth and recovery in steel prices
Faster-than-expected improvement in the global macroeconomic environment, thereby driving improvement in the European business.
Risks to downside
Sharp correction in the international steel prices.
Deeper-than-expected losses in Europe.
CLSA
Maintains an 'outperform' rating with a target price of Rs 135.
Brokerage terms expect third-quarter numbers to be in line with their estimates. Consolidated Ebitda of Rs 4,318.4 crore was largely in line with the brokerage's estimate of Rs 4,120 crore.
However, Ebitda adjusted for FX movement on intercompany debt and receivables was much lower at Rs 2,730 crore.
The brokerage awaits clarity on the adjustments and profitability outlook in the post-earnings call.
Key risks include lower-than-expected volumes due to Covid-19.
Upside potential comes from higher-than-expected steel prices in India and Europe, as well as lower iron ore and coking coal prices.
JPMorgan
Large losses were driven by inventory non-return value hits in Europe and a muted operational expenditure decline in India.
Headline PAT was impacted by deferred tax of Rs 2,150 crore post the insurance scheme buy in.
Underlying India's Ebitda per tonne was up by Rs 1,638 per tonne sequentially in the third quarter, at Rs 10,379 per tonne.
In the brokerage's view, the key near-term event to focus on would be China’s demand improvement over the coming weeks. Steel prices have increased by 10%, and this will flow through to earnings in the March and June quarters.
Key positives for the company are the visible pickup in Indian demand across segments and a broadly stable net debt as capital expenditure stood at Rs 3,150 crore in Europe.
We estimate domestic steel prices in India have increased by 10% from December exit levels, and Ebitda per tonne for the company should increase in the March and June quarters.
Given the company's relatively higher contract sales volume, the flow through of spot prices would be with a lag, as per the brokerage.
Macquarie
Maintains an 'outperform' rating with a target price of Rs 120.
Consolidated EBITDA adjusted for forex gains missed the brokerage's target by 22% of Rs 3,560 crore, implying a 22% miss.
According to the brokerage, the company missed estimates across segments, and a key driver was the weaker-than-expected Ebitda of a product subsidiary, which reported earnings in January 2023.
Tata’s core standalone domestic Ebitda of Rs 4,760 crore was 4% below the brokerage's estimate.
The brokerage expected domestic margins to improve due to the recent hike in the steel price.
Brokerage's view that near-term risk is skewed to the upside, a resumption of exports, removal of the 15% export duty and gains from backward integration of iron ore also aided the margins.
Consolidated net debt of Rs 71,700 crore was flat sequentially, while the company incurred Rs 4,000 crore in capital expenditure during the quarter, helped by lower working capital.
Jeffries
Maintains a 'buy' rating with a target price of Rs 150, implying an upside of 25%.
As per the brokerage, the India business margins improved sequentially, but the Europe business was a drag.
Ebitda fell 33% sequentially and was 36% below Jefferies estimates, led by weak margins from the European business.
The company reported a net loss of Rs 2,223.8 crore, pulled down by non-cash deferred tax items related to the U.K. pension plan. Net debt was flat QoQ.
Key downside risks, as per the brokerage, include lower steel prices and higher coking prices.
Bank of America
Reiterates a 'buy' rating with price objective of Rs 138 on the stock.
Consolidated recurring net loss at Rs 600 crore was miss as compared to brokerage's estimate of Rs 200 crore.
Reported net debt was stable on a sequential basis at Rs 71,700 core as a reduction in working capital was offset by adverse FX.
New projects remain on track, with phased commissioning of the 6 MTPA pellet plant and 5 MTPA Kalinganagar expansion having begun. Neelachal Ispat Nigam Ltd. has begun operations and is being ramped up to 1 MTPA.
Brokerage retains 'buy' on low-cost positioning; deleveraging focus and positive view on India steel backed by improving price outlook.
Brokerage expects profitability to improve in the coming quarters on recovery in global steel prices with Indian HRC still trading at a discount to China/Japan.