Tata Steel Q1 FY25 Concall Highlights: Navigating Soft Steel Prices and Strategic Transitions
Tata Steel reported a mixed bag of results for the first quarter of fiscal year 2025 (FY25), navigating soft global steel prices and undertaking key strategic transitions, particularly in the UK. While India operations demonstrated steady demand and growth, the company faced challenges in the UK and Netherlands due to lower steel prices and ongoing restructuring efforts. The company remains bullish about India's growth prospects and is actively pursuing expansion plans, while also engaging with governments for support in transitioning towards a greener steel-making future.
a. Financial Performance
Tata Steel's consolidated revenue stood at ₹54,771 crores, and consolidated EBITDA reached ₹6,822 crores, translating to an EBITDA margin of 12.5%. This represents an improvement of over 100 basis points sequentially, despite challenging global conditions. Notably, the standalone EBITDA for the quarter was ₹6,750 crores, with an EBITDA margin of about 20%. On a per-ton basis, standalone EBITDA was ₹13,661 per ton.
Koushik Chatterjee, ED & CFO, highlighted the impact of lower material costs, primarily driven by a decline in coking coal consumption costs, as a key factor offsetting the impact of lower volumes and seasonally softer demand. However, he also noted an increase in the valuation of chrome ore inventory, leading to a non-cash credit in the raw material cost line.
b. Operational Updates
Crude steel production in India was 5.27 million tons, up 5% year-on-year (YoY) but down 2% sequentially due to planned maintenance shutdowns. Deliveries, however, were at a record high of 4.94 million tons in Q1 FY25, fueled by a 4% YoY increase in domestic deliveries.
The company saw robust growth in certain segments, including a 9% YoY growth in automotive and special products volumes. Tata Tiscon, the company's retail brand, witnessed a 15% YoY growth driven by an enhanced reach and focus on consumer connect programs.
In the UK, the company safely ceased operations at blast furnace #5 in Port Talbot in early July and is on track to close blast furnace #4 by September 2024. This marks a significant step in transitioning the UK operations to a more sustainable business model. Koushik Chatterjee emphasized the company's commitment to supporting affected employees through training and community support schemes. In Netherlands, production stabilised after BF6 relining, leading to positive EBITDA.
c. Management Insights
T. V. Narendran, CEO & MD, highlighted the impact of subdued economic activity and tight monetary policy conditions on global steel demand. He stated that China's steel exports, driven by production cuts outpacing demand moderation, impacted markets globally.
"During the quarter, the global steel demand across most regions was impacted by subdued economic activity and tight monetary policy conditions," said Narendran.
Regarding India's steel market, Narendran acknowledged some impact from elections, heat waves, and seasonal weakness, but noted that overall demand remained stable. However, steel prices softened across geographies, with the US seeing a decline of 8-15% and India seeing a more stable but ultimately downward trend.
d. Strategic Initiatives and Future Plans
Tata Steel's management outlined several key strategic initiatives for future growth:
- Kalinganagar Expansion: The company is on track to commission the Kalinganagar expansion by the end of September 2024, with an expected output of 1.7 million tons.
- Jamshedpur Capacity Expansion: The G-blast furnace in Jamshedpur will undergo relining in Q4 FY24, leading to a planned increase of 1.4 million tons for India in FY25.
- Combi Mill in Jamshedpur: A 0.5 MTPA combi mill in Jamshedpur is expected to come online in the second half of FY25, leveraging the acquired Usha Martin Steel assets.
- Transition to Green Steel: Tata Steel is actively pursuing transition plans towards green steel in both the UK and Netherlands, with discussions ongoing with respective governments regarding potential support. This includes replacing blast furnaces with Direct Reduced Iron (DRI) plants and Electric Arc Furnaces (EAFs).
- Neelachal Ispat Nigam Limited (NINL): The company has achieved positive PAT within two years of acquiring NINL and is operating at rated capacity.
e. Q&A Session Highlights
Market Conditions & Cost Outlook: Management provided guidance on net realizations for Q2 FY25, indicating a decline of ₹1,500/ton in India, a flat outlook in the UK, and a £60/t reduction in the Netherlands compared to Q1 FY25. Cost commentary included anticipated decreases in coal costs, particularly in India and the Netherlands.
UK Operations: Management maintained its expectation that the UK operations will move towards EBITDA breakeven in the second half of FY25, with a potential for positive territory thereafter, once the blast furnaces are closed.
Odisha Mineral Royalty: Management clarified that the Supreme Court's ruling on states' rights to levy a mineral royalty tax is a point of law, and that it is up to the central government to clarify the implementation of this ruling. They acknowledged the potential impact on costs but also emphasized the need for a uniform policy across states.
Capacity Expansion & Timeline: Management provided details about their planned capacity expansion projects in India, including Kalinganagar and Ludhiana, indicating a gradual approach to expanding capacity. The discussion also touched upon the potential to accelerate the transition to EAFs in the UK, with the Labour Party's support and the opportunity to expand the scope of the project beyond the initial 3 MTPA target.
Key Takeaways and Outlook
The first quarter of FY25 presented both challenges and opportunities for Tata Steel. While global steel prices softened and impacted profitability in some segments, the company achieved strong performance in India, with a focus on domestic demand and strategic expansions. The company's transition plans in the UK toward more sustainable operations continue, and the company remains engaged with governments for support in pursuing decarbonization and downstream opportunities.
Tata Steel's management is optimistic about India's growth prospects and sees significant potential in capacity expansions, particularly in Kalinganagar and NINL. The company's approach toward green steel initiatives, including discussions with governments in the UK and Netherlands, demonstrates a commitment to a sustainable future. However, the uncertainty related to mineral royalty taxes and the overall global steel market presents potential challenges that the company will continue to navigate. Overall, Tata Steel appears well-positioned for growth and sustainability in the long term.
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