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New UserCoking coal cocks a snook at Tata Steel show
16 Sep 2016
Tata Steel's stock has gained 63% over the past 12 months following factors such as
minimum import price (MIP) for steel and higher international steel prices during the period.
The momentum, however, may not sustain given the rising debt, increasing prices of coking
coal, a major raw material, and an expectation of weak results for the September 2016 quarter.
Although the June 2016 quarter numbers were marginally better than expected
consolidated operating profit before depreciation (EBIDTA) of Rs 3,270 crore against the
expectation of Rs 2,900 crore and 60% higher quarter on quarter the profitability is likely to
be lower in the current quarter.
Coking coal prices have doubled since June and may reduce the operating margin in the coming quarters, taking away a part of the
benefits of higher realisations.The cost of coking coal is around 1718% of the total cost for the company's Indian operations. The
proportion may increase to 3035% due to higher price.
In the June quarter, EBIDTA per tonne rose by 27% quarteronquarter for the Indian operations. This was due to the introduction of MIP in
steel in February and imposition of antidumping duty . In addition, global steel prices rose after February due to lower supply . But, the
upside in the realisations is expected to be capped due to supply glut. Limited upside in the steel prices and higher coal cost will,
therefore, limit the realisations.
Rising debt will be another factor that investors need to consider. Net debt rose by 6% quarteronquarter to Rs 75,300 crore on account of
higher working capital, capital expenditure and translational losses related to overseas assets due to currency fluctuations. The debt rose
despite sale of its long products business in UK. It is more than five times the expected FY17 EBIDTA, which is on the higher side.
Due to volatility in the earnings, there is uncertainty about how and when significant debt reduction will happen. The company has been
talking with a few buyers to sell some of its UK and European assets. A delay on this front would worsen the debt profile further.
At Thursday's closing price of Rs 366.9, the company's enterprise value was seven times FY17 expected EBIDTA, which is on the higher
side of the average multiple for the past five years. This is likely to limit a further rise in the stock price in the near term.
Source: ET