Tata Steel Swings to Quarterly Profit on Volume, Price Gains

Tata Steel Ltd. swung to a profit in the second quarter as the Indian mill benefited from a recovery in global steel prices and an increase in volumes, although it missed analyst estimates.

The company reported a 9.76 billion rupee ($150 million) profit for the three months ended September, compared with a loss of 799 million rupees a year earlier, according to a statement from the steelmaker Monday. That compares to an average forecast of 16.6 billion rupees from analysts’ estimates compiled by Bloomberg. Revenue climbed about 20 percent from a year earlier.

In the past year, the Indian company has sold off some of its unprofitable assets in the U.K. as it sought to cut losses. Last month, it agreed to partner with Thyssenkrupp AG in Europe to fight a glut in supply. The proposed partnership allows the company to focus on the growing Indian market, where Tata Steel plans to double production capacity to about 26 million metric tons in the next five years.

“We remain positive on the outlook of India as encouraging government reforms are expected to facilitate domestic investment and growth in the coming years,” Managing Director T. V. Narendran said in the statement. “The thrust on tax reforms and transparency will also facilitate the formalization of economy and serve as tailwind to players like Tata Steel.”

The global steel sector is benefiting from China’s crackdown on pollution that has boosted prices to a more than five-year high. Nippon Steel & Sumitomo Metal Corp., Japan’s biggest producer, saw its first-half profit surge nine-fold, while South Korea’s largest mill Posco expects to reap higher earnings in the fourth quarter.

Commodity Cycle

“Globally, there was a recovery in the commodity cycle, with cuts in Chinese steel capacities and stronger demand resulting in improving utilization levels of mills in China,” said Koushik Chatterjee, group executive director at the Mumbai-based steel producer.

This, coupled with a recent uptick in raw material prices, lifted the steel prices across regions, he said.

Last month, Tata and the trustee of the British Steel Pension Scheme agreed to separate the retirement plan from the steelmaker’s U.K. unit. Tata Steel agreed to pay 550 million pounds ($723 million) and a 33 percent equity stake in the U.K. operations to the trustee.

“For Tata Steel, we see a long runway of growth in India and an attractive value creation opportunity from the JV with Thyssenkrupp,” Bank of America Merrill Lynch said in a report on Oct. 26. The company will benefit from management’s focus on value-accretive capacity expansion in India, successful resolution of the long-pending pension issue in Europe and the collaboration with Thyssenkrupp, it said.

Tata’s costs rose to 305.7 billion rupees in the quarter, from 268.7 billion rupees a year earlier, the company said. Gross debt rose by 24.5 billion rupees to 902.6 billion rupees because of an increase in working capital lines and foreign-exchange changes, while cash and cash equivalents totaled 198 billion rupees, it said.

The steelmaker’s shares fell 1.2 percent to 718.25 rupees in Mumbai on Monday before the earnings were announced, paring gains to 84 percent this year.

Source: Bloomberg