Tata Steel paradox: How a huge loss has whetted bull appetite

More surprising than the unexpected loss of Tata Steel was the market’s reaction to it. Tata Steel posted a net loss of Rs 687 crore against market expectations of a Rs 340 crore profit. However, despite opening lower, the stock traded 4.5 percent higher at Rs 472.50 around 2.45pm on Friday.

The unexpected loss was on account of a writedown in its inventory, especially in Europe, to the tune of Rs 740 crore.

More than the historical data the outlook projected by the company seems to have caught the market’s fancy.

Tata Steel, in its presentation to analysts, has highlighted the improving scenario in Europe, where prices have shown an improvement in the current month due to closure of units in the area and falling raw material prices.

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Events at the company’s European operations have a bigger impact on its bottomline than its Indian operations. This is highlighted from the fact that though the contribution of Europe’s sales to overall sales is 62 percent, the contribution to operating profit is negligible in the December quarter (adjusted for inventory write-offs).

Operating profit per tonne for the Indian operations is $303 per tonne while for Europe it is $-1 per tonne. The company produces 1.62 million tonnes in India while Europe contributes 3.35 million tonnes. Thus, due to its size, even a minor movement in cost or selling price in Europe has a bigger impact on the operating profit of the company.

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[caption id=“attachment_209541” align=“alignleft” width=“380” caption=“Events at the company’s European operations have a bigger impact on its bottomline than its Indian operations. Reuters”]  [/caption]

Prices in Europe are already higher by 90 per tonne in January. A decline in raw material prices due to the closure of plants in Europe can add to the operating profit considerably. With China expected to reduce production by nearly 100 million tonnes from its peak level, steel prices are expected to remain firm with a higher possibility of reduction in raw material prices.

As far as the Indian operations are concerned the current quarter will see the benefit of a Rs 1,500 per tonne of hike in steel prices plus also an addition of 1 million tonnes in capacity, which is expected to be commissioned in the current quarter.

Taking these factors into account, it is clear when punters are looking less at the losses in the rear-view mirror. They are looking ahead and smacking their lips in anticipation.