Tata Steel in a sweet spot amid rising iron ore prices

ET Intelligence Group: Steel prices in China and the US are at a 12-year high while in most other markets including India, they have touched an eight-year high. While this should benefit the steel makers, a sharp jump in prices of iron ore, a major raw material, may spoil the party. Under such conditions, steel companies with captive iron ore mines stand to gain the most. Among listed steel companies on Indian bourses, Tata Steel looks better placed. Crude steel production in November grew by 6.6% year-on-year driven by 8% growth in China and 5.5% increase in Europe. This has increased the lead time or delivery time for finished steel creating shortage of the alloy.In addition, iron ore prices have shot up by 25%, muvh faster than the 8% rise in the domestic steel prices over the past month. This is due to the shutting down of mines by Brazil’s mining major Vale due to landslides. Vale is the second largest iron ore producer accounting for nearly 20% of the global supply. The miner has lowered the production guidance for 2020 and 2021, indicating that the supply shortfall is likely to stay for a few more months.Domestic steel makers have raised prices thrice over the past month. Sector experts believe there is still some room left since the domestic prices are at a 5% discount to the imported prices. Analysts expect Tata Steel’s operating profit before depreciation and amortisation (EBITDA) to grow by 34% year-on-year to Rs 23,500 crore in the second half of the fiscal year. In the September quarter, its EBITDA had increased by 60% to Rs 6,110 crore EBIDTA following negligible profit in the previous quarter.Higher earnings is likely to accelerate the deleveraging process, which has been an overhang on the stock. It reduced the net debt by 8% year-on-year to Rs 96,500 crore in the September quarter. Net debt relative to EBIDTA is expected to be less than 4 times at the end of FY22 compared with the expected six times in FY21.The decision to exit the volatile and cash guzzling European operations will further improve the domestic focus as the former business had impacted the pace of growth in India. Over the past 12 years, its capacity grew by 4.7% annually compared with the 6.3% growth in the capacity of JSW Steel.At Thursday’s closing price of Rs 622.3, Tata Steel’s enterprise value (EV) was seven and five times the estimated EBITDA for FY21 and FY22 respectively.
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