The mystery behind the fall in Tata Steel’s shares despite a seven-fold rise in profit

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The mystery behind the fall in Tata Steel’s shares despite a seven-fold rise in profit
  • Tata Steel has announced strong net profit in September quarter that grew 7 times on year to ₹12,548 crore.
  • An average trader may have expected the shares to jump but it didn’t.
  • One of the reasons for the street’s disappointment was the slow pace of debt reduction in the company.
  • It was the sharp fall in global steel prices that caused the bigger dent to the steel maker’s stock price.
  • Check out the latest news, analysis and updates on Business Insider.
Those who were preparing to buy Tata Steel shares on Friday (November 12) morning ⁠— because the quarterly profit had grown a surprising seven fold ⁠compared to the same time last year — were in for a rude shock. The stock slipped over a percent into the red by midday.

While the profit growth was a reason to celebrate, the slow reduction in debt turned out to be the party pooper. But that was just an excuse. The tide had turned downwards for steel stocks, as a whole, long before the earnings.
Steel companies % returns in last 3 months
Tata Steel-10%
JSW Steel-11%
Steel Authority of India (SAIL)-14%
Jindal Steel & Power-7%

The steel price index in China has declined in the last couple of days, triggering a similar collapse in other parts of the world too. “Metal stocks like Tata Steel, JSW Steel, Jindal Steel and SAIL declined 2-4 per cent after the news that China’s steel prices had declined rapidly amid weakening demand and lower material prices, and that prices are likely to slide further in the fourth quarter,” reportedly said Vikas Jain, Senior Research Analyst at Reliance Securities

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Tata Steel’s debt problem

Tata Steel repaid ₹11,424 crore in the first half of the current financial year and the company has targeted additional, aggressive deleveraging in the second half. The steel maker’s debt stands at ₹68,860 crore ($688 billion).

“Numbers (earnings growth) were below estimates as EBITDA was expected at ₹19,000 crore and debt repayment was also a bit lower than estimated because of build up in working capital,” said Jatin Damania, research analyst at Kotak Securities. EBITDA ⁠— which stands for earnings before interest, taxes, depreciation, and amortization ⁠— stood at ₹16,618 crore for the July-September 2021 quarter.

That’s a number that the company has not seen in 16 years. It can’t be bad but then again, the market wants to see a significant reduction in debt that piled up over the years.
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The mystery behind the fall in Tata Steel’s shares despite a seven-fold rise in profit
Flourish chart

The temptation to take profit home

Some analysts believe the fall in stocks is a profit booking phase given the stock has doubled in 2021 so far. “The stock may have seen a lot of profit booking as it is not cheap. It is up 5 times from the one-year low. I believe 2022 will belong to metals,” Sanjiv Bhasin, executive vice president, markets & corporate affairs at India Infoline, told Business Insider.

Meanwhile, analysts at CLSA reportedly expect Tata Steel shares to hit ₹1,950 in the next one year, that would mean a 50% rally from Thursday’s close of ₹1,299.
The mystery behind the fall in Tata Steel’s shares despite a seven-fold rise in profit

It’s not all gloomy

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There is a reason why both India Infoline, CLSA and others expect next year to be better.

The pressure on prices that’s visible now may ease because the power shortages in China have led factories to idle and production to fall. This will allow steel makers in other parts of the world to charge more for their product.

As for debt reduction at Tata Steel, the company has laid out a plan to cut it by $2 billion in a year. The street will monitor the progress and react accordingly.
BrokeragesTarget price
CLSA₹1,950
Jefferies₹1,600
Macquarie ₹1,817
JP Morgan₹1,810

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