The market’s subdued reaction to Tata Steel’s fourth quarter numbers may have been due to concerns over the increase in the debt levels after the acquisition of Bhushan Steel is completed.

Tata Steel reported a robust set of numbers for the quarter. It reported a consolidated net profit of ₹14,688 crore for the period, against a net loss of ₹1,168 crore logged during the Q4 last year. The profit was boosted by a one-time gain of ₹14,077 crore.

Consolidated revenues from operations increased by 8 per cent YoY to ₹36,132 crore.

Despite an unscheduled plant shutdown, the company managed to deliver healthy numbers from both its domestic and European operations. With capacity expansion plans in India and restructuring activities in Europe, the company is well positioned to build a strong earnings profile that could bring down the debt to reasonable levels by boosting operating profits.

Getting stronger in India

The production of crude steel in the quarter fell by 4 per cent y-o-y to 3.07 million tonnes.

Due to the weak volumes, the revenue for the quarter fell by nearly 5 per cent y-o-y to ₹16,281 crore. However, the company delivered higher operational profits of ₹4,823 crore, a rise of about 12 per cent y-o-y. This was due to the better realisations for steel in the quarter. The EBITDA (Earnings before interest, tax, depreciation and amortization) per tonne has also improved by 18 per cent to ₹15,932 per tonne.

The outage issue has been resolved and the plant is running at full capacity, according to the management.

Europe solution

Over the past two years, Tata Steel has been spinning off parts of its debt-laden, loss-making European business that was bleeding the consolidated financials. Tata Steel Europe, which has contributed nearly ₹3,792 crore to the group’s operating profit (17 per cent of consolidated operating profit) is going to form a 50:50 joint venture (JV) with Germany’s Thyssenkrupp AG.

Also, the company proposes to monetise few downstream assets in Europe. However, it is expected that the contribution from Bhushan Steel will be able to compensate for the loss of operating profit from Europe.

Huge debt

The consolidated net debt was ₹69,215 crore as on March 31, 2018. At these levels, the net debt to operating profit ratio stood at 3.13 times, lower than the 4.24 times reported a year ago. In the next few years, though debt close to ₹20,000 crore gets deconsolidated due to the JV with Thyssenkrupp AG, an amount of about ₹35,000 crore that will be raised to acquire Bhushan Steel will increase the net debt levels to approximately ₹84,000 crore.

But the management is confident of maintaining the debt coverage ratio at around three times over the long run.

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