When lockdowns were imposed in India and across the world in early 2020, investors wouldn’t have believed that there would be a commodity super-cycle that would push up prices to record highs. The economic outlook was gloomy and it wasn’t clear how India’s and other global economies would climb out of economic recession.

The answer that emerged: countries would spend their way out of economic slowdown. Many countries including India decided to spend on infrastructure to pull up their economies out of the slowdown caused by the pandemic. In January 2021, steel prices in India  touched record highs, which led to user industries like the automotive industry hiking prices

As a result steel product makers like Tata Steel saw their stock prices touch new highs. To give a sense of the impact, Tata Steel’s stock price nearly doubled since February 2021. That’s just in the past three months. So much so that despite the consolidated volume of steel delivered to customers not rising by much after Q2FY21, the company’s financial performance was solid.

High steel prices aid deleveraging

Tata Steel took advantage of the rise in steel prices in FY21 to accelerate its debt reduction plan. The company had guided for a $1 billion reduction in its debt in FY21 at the beginning of the year. But what it ended up achieving at the end of the financial year was over 3.5 times the guided amount, as the company’s net debt (gross debt minus cash and cash equivalents) fell by Rs 29,390 crore.

Tata Steel has guided for a similar amount of debt reduction in FY22 as well. The company also said that it is open to acquisitions to bolster its long steel products portfolio. The company has a decent opportunity to increase its capacity of flat products at its Angul and Kalinganagar plants.

The rise in steel prices helped Tata Steel’s earnings before, interest, tax, depreciation and amortisation (EBITDA) per tonne of steel sold to rise as well. So much so that, EBITDA per tonne more than doubled in Q4FY21 when compared to Q2FY21.

The rise in steel prices, and the resultant EBITDA per tonne essentially helped Tata Steel to accelerate the deleveraging of its balance sheet, accompanied by a rise in the company’s revenues and profits.

The company has guided for an additional 1 million tonne volumes for FY22. This is essentially the lost volumes due to lockdowns in the first half of FY21. The company expects revenues to rise in FY22 as the company’s cold rolling mill will get commissioned. This will improve margins further, and aid revenue growth. In a way, revenues will grow even if volumes don’t grow at a fair clip

Is the future perfect?

With China discouraging exports of steel to meet its emission control targets, the world is hungry for steel. This positions companies like Tata Steel on a strong footing. With many countries, including the US and India planning to invest in infrastructure to kick-start their economy, steel demand is expected to remain buoyant.

The company pointed out that the Indian economy had slowed over the past three years before the pandemic, and the current investment spree in infrastructure will persist over the next decade. This, the management feels will prop up steel demand over the next ten years or so.

The company has also committed to expanding its stalled expansion of the Kalinganagar plant, which will add an additional 5-million-tonne capacity. This remains its key focus as the management expects its future growth in India to be sustained from the capex (capital expenditure) for this plant. This expansion is expected to be completed by FY24

The company has guided for a capex of Rs 11,000 crore, with Rs 7,500 crore for Indian operations focussed mainly on the 5-million-tonne capacity addition at Kalinganagar. Although steel prices are higher in the US and Europe, the company said it is focussing on volumes from India. The rise in prices led to its European subsidiary’s revenues rise marginally in FY21, despite delivery volumes in Europe falling by 5% to 8.8 million tonnes.

In the current second wave of the pandemic in India, the management sounded sanguine of its prospects in FY22. This is mainly because lockdowns haven’t crippled its operations like last year. But there are niggling worries about economic activity, as the lockdowns have hit the Indian economy. The government’s order to stop usage of liquid oxygen for industrial units has also hit some fabrication units, the management said.

These concerns are not material as of now, though. The management is in wait and watch mode to see how the situation unfolds over the next 2-3 weeks to assess if there will be any significant impact on demand. The saviour, in case there is a fall in steel demand in India, seems to be the international market. The company feels that with steel prices staying strong in the international market, any slowdown in steel demand in India will not have much impact on its sales.

Investors who have pushed Tata Steel’s stock to new highs since February 2021 should know that the optimism is overplayed. All the positives have been priced into the stock. The expectation from the street seems to be that Tata Steel will continue to do what it’s been doing for the past year. The Q1FY22 results will tell us whether this is wishful thinking.