Will Tata Steel's production in Europe impact its revenues?

Tata Steel has announced a cut in the production of its European steel making division by 15%-18%. The cut has come over a continued slowdown in the European economy, which has forced the company to take such action. As per the media reports, the company has said the move will improve the situation of the units in Europe. Out of the total 28 MTPA capacity, Tata Steel Europe has around 18 MTPA steel-making facilities. As per the 2011 Annual Report, 65% of the revenues come from the European operation, and rest comes from India and other countries.

Any cut in production in Europe may lead to a cut in the revenues as well. We, at DSIJ, went into the details to gauge the impact that this cut will have on the company’s sales in the coming quarter.

The European division produced 14.6 MT and 14.4 MT of crude steel in 2011 and 2010 respectively. In the last 2 quarters, the production stood at 6.98 MT. The first half has remained quite good in terms of production. While the 3rd quarter has also come to an end, the numbers have not been announced yet. An 18% cut out of 3.5 MT will not lead to any major impact in the coming quarter. Therefore, we believe the cut in the production will not have much impact on the company’s revenues for FY12.

Tata Steel’s financial performance in the Sep 2011 quarter was not particularly good. The company reported lower growth in sales volume by 0.83%. The operating performance also remained subdued, and was down by 34%. This was largely on account of higher raw material, power/fuel and freight charges, which were up by 15%, 18.5% and 14.8% respectively.

The domestic performance of the company remained much better than its overseas operations. The standalone net sales grew by 15%, but its EBITDA margin was down by 9% as compared to the consolidated margins, which was down by 34%. The company's Managing Director, H M Nerurkar, said that continued interest rate hikes impacted steel demand growth, but the company sequentially increased sales volumes due to its enhanced market reach and customer focus.

Moreover, the major hit came on the bottomline of the company, which declined by 92%. This was largely because of the 'Other Income' component, which was down by 85%, and some impact was due to forex losses.

The steel sector is going through tough phase worldwide. With muted demand, surplus capacity and higher raw material prices, the steel companies have underperformed on the exchange in the last one year. The major steel companies in India have fallen almost by 50% over the period. Tata Steel has fallen by 51.7% on a YTD basis.

We believe that the company's outlook for the next 6 months may remain grim, especially from the debt-ridden European region, where it generates 65% of its revenues. After continues rate hikes by the RBI, this seems to be the case in India as well, and we believe that the forthcoming 6 months in India will remain challenging on the demand side.