Why Tata Steel Share Price is Falling

The steel sector in India is one of the core industries driving economic growth. Steel is essential for infrastructure, manufacturing, and construction.

This sector is influenced by factors like demand-supply dynamics, global commodity prices, and government policies.

Recently, fluctuating global prices and economic uncertainties have impacted steel companies in India. Speaking of the steel sector, it would be impossible not to mention Tata Steel.

Tata Steel is one of India's oldest and most renowned steel manufacturing companies. It operates globally, with a presence across various continents, and produces a wide range of steel products catering to construction, automotive, and industrial needs.

Tata Steel share price is under investor focus lately, especially after it tumbled by 8.6% over five days following the announcement of its quarterly results.

This decline has raised concerns among investors, leading them to analyse the company's recent financial performance.

Let's take a closer look at Tata Steel's quarterly results to understand the reasons behind the decline in its share price after the announcement.

#1 Dull Quarterly Results

In Q2 FY25, Tata Steel reported a profit of Rs 8.3 billion (bn), a significant improvement from the previous year's loss of Rs 62 bn in the same quarter.

This positive shift in profitability is attributed mainly to the absence of last year's impairment charges, which had lowered profits substantially but were not repeated this quarter.

Despite the profit increase, Tata Steel's revenue from operations declined by 3% year-over-year (YoY) to Rs 539.1 bn. The primary reason for this drop in revenue was a decrease in earnings per tonne of steel sold, especially in key markets facing pricing pressure due to challenging global conditions.

Production in India rose by 5%, reaching 5.3 million tonnes, reflecting strong domestic demand. Yet, despite higher production volumes, revenue from Indian operations fell by around 5%. This decline stemmed from lower market prices and increased competition from cheaper imported steel, which affected the company's pricing power and revenue growth.

During this period, Tata Steel reported earnings before interest, tax, depreciation, and amotisation (EBITDA) of Rs 61.4 bn, with operating margins at 11.4%. The slight drop in margins reflects the pressure from rising raw material costs and lower selling prices in key markets.

Although Tata Steel posted a rise in net profits, investors remain cautious. The drop in revenue and operating margins, coupled with pressure from competitive pricing, have sparked concerns about the company's future revenue growth.

Consequently, the share price fell despite the improvement in profitability, as the market's focus remains on the broader revenue and margin trends that could impact long-term performance.

#2 Weak Sectoral Outlook

Tata Steel is grappling with a subdued outlook for the steel sector. Global economic pressures, persistent inflation, and high interest rates have collectively dampened demand for steel.

Slower economic growth across key markets, including Europe and China, has led to a decline in industrial activity, reducing steel consumption. The influx of cheaper steel from China, which continues to ramp up exports, is adding further strain by intensifying competition and pushing prices down globally.

In Europe, environmental regulations and the transition to greener steel production are increasing operating costs. These additional expenses, while aligned with long-term sustainability goals, add financial burdens in a period of already low profitability.

For Tata Steel, this means facing higher costs in markets where demand is weakening, creating a difficult balance between maintaining margins and meeting regulatory requirements.

The situation is similarly challenging in India, where domestic steel prices have softened due to excess supply and competitive pressures from imported steel.

Despite India's infrastructure growth initiatives, rising costs of raw materials, energy, and compliance are squeezing margins. Lower prices and competition from imports make it difficult for domestic steelmakers, including Tata Steel, to fully benefit from local demand.

Thus overall weak sectoral outlook is causing concern among investors, who are skeptical about the industry's ability to rebound quickly.

The combination of sluggish demand, price pressures, and regulatory costs is expected to persist in the near term, keeping the steel sector under pressure.

What Next?

The steel industry is currently facing weak profitability due to lower-than-expected prices and global economic pressures.

While recent steel prices have risen to over US $ 500 per tonne, the management of Tata Steel, believes that a range of US $ 550-600 is necessary to ensure sustainable profitability.

At current price levels, steel companies may struggle to generate sufficient cash flow to support planned expansions and meet return-on-investment targets.

Given that steel production is highly capital-intensive, Tata Steel remains cautious, emphasising that demand alone may not justify new capacity if pricing does not improve.

For the future, Tata Steel has outlined several strategies and goals to adapt to the evolving market environment. The company is currently on track to meet its capital expenditure guidance of Rs 160 bn for the year.

However, despite its intention to reduce debt by US$ 1 bn annually, this target has not been met in the past two years. As of now, Tata Steel's net debt stands at Rs 880 bn, with a goal to lower it to around Rs 750 bn over the next three to four quarters, contingent on market stability or improvement.

The company also aims to bring its net debt-to-EBITDA ratio down to below 2.5 times from the current 3.4 times, focusing on reducing financial leverage and improving balance sheet strength.

In terms of expansion, Tata Steel has ambitious plans for its Neelachal Ispat Nigam facility. The company intends to increase its capacity from 1 million tonnes (MT) to 5 MT in the first phase, positioning Neelachal as a key contributor to its growth in the high-margin domestic market.

Additionally, Tata Steel continues to prioritise investments in sustainable steelmaking, particularly in the UK, where it is transitioning to green steel production with support from a £ 500 million (m) grant.

This shift, while costly in the short term, is expected to secure Tata Steel's future competitiveness as environmental regulations tighten globally.

As Tata Steel works towards its debt reduction and expansion goals, its future performance will largely depend on achieving a more favorable pricing environment, which is essential for sustaining growth in a challenging sector.

How Tata Steel Share Price has Performed Recently

In the past five days, Tata Steel share price has slipped 8.6%. In the last month, it is down 12.8%.

In 2024, so far its share price is down by 1.3% and it rallied 11.3% in the last year.

The stock touched its 52-week high of Rs 184.6 on 18 June 2024 and a 52-week low of Rs 121.5 on 15 November 2023.

About Tata Steel

Tata Steel is Asia's first integrated private steel company.

The company is primarily engaged in the business of manufacturing and selling finished steel goods.

It's present across the value chain, from the mining of iron ore and coking coal to the distribution of steel, and value-added products.

The company caters to several industries through its broad product portfolio, including automobiles, construction, agriculture, industrial, and general engineering. It has a global presence and caters to the steel needs of over 50 countries across five continents.

To know more about the company, check out Tata Steel's financial factsheet and its latest quarterly results.

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