Tata Steel set to swing TCS on profit measurement

The steelmaker’s turnaround, five years after posting an annual loss, poses one less worry for Tata Sons chairman N. Chandrasekaran for now, as the conglomerate seeks to prepare for the future – combining the group’s consumer brands as part of a “super app” to integrate its acquisition of loss-making flag carrier Air India.

Chandrasekaran, whose term was extended for another five years on Friday by Tata Sons’ board, oversees the sprawling group which includes 30 companies in 10 verticals with a combined revenue of $103 billion in 2020-21 . Tata Steel profit totaled 31,914 crore in the first nine months of this fiscal year to March, higher than TCS 28,490 crore. Keeping pace, Tata Steel is expected to end the year with a profit that beats TCS for the first time in 14 years.

Tata Steel profit totaled 12,350 crore in FY08, more than double of 5,026 crore at TCS. It came at the height of the last commodities cycle and at a time when Tata Steel paid $12.2 billion to buy Corus, the Anglo-Dutch steelmaker.

Since then, Tata Steel’s journey over the past decade has been rocky, with the company reporting losses in the 2013, 2015, 2016 and 2017 financial years.

Analysts, however, are skeptical that Tata Steel can extend its stellar run into next fiscal year.

“Since we passed the peak of the steel cycle, the price trajectory has been downward,” Vishal Chandak, an analyst at Motilal Oswal, wrote in a note dated Feb. 8.

“Once the Olympics and Paralympics are over, China could increase steel production and exports to boost the economy which has been strangled by: a) covid-related lockdowns, b) clear skies policy until at the end of the Beijing Olympics, and c) the so-called carbon reduction targets. We think these measures could be eased if the Chinese economy continues to tumble. This poses a risk to global steel prices.”

ArcelorMittal last week reported its highest profit in more than a decade, but the world’s second-largest steelmaker forecast slower growth this year as it expects demand for steel to slow.

Still, Tata Steel remains confident.

“Steel prices have moderated in key regions, including Western markets, but remain high compared to a year ago. In India, demand for steel has started to improve thanks to the continued economic recovery as the third wave of the covid pandemic begins to ebb Overall, while steel prices will continue to be volatile, as seen over the past 12 months, we believe they will trend towards a higher level compared to the past 10 years,” a Tata Steel spokesperson said.

The spokesman said the global steel industry is facing rising costs for consumables, raw materials and energy, which have inflated overall costs. “With an increased push on greener processing routes and inputs, operating costs will come under pressure. The dynamics of steel trade are also changing. Unlike the past decade, when countries like China, the Japan and Korea were exporting in large volumes, the coming years will see a more balanced steel trade given growing concerns over carbon footprint and net neutrality aspirations,” the spokesperson said.

TCS and Tata Steel operate on two distinct poles of the Tata group. The software services company has a healthy and debt-free balance sheet, having returned more than $15 billion to parent company Tata Sons, which owns 72.2%, in dividends and share buybacks since 2016, according to a report. Mint’s analysis.

TCS, which generates 95% of its business outside India, has not bought a single company in the past seven years as management only considered organic expansion instead of a strategy of acquisition-driven growth.

In contrast, Tata Steel has changed its strategy to focus on the domestic market, having increased its steel capacity by almost 10 million tonnes per year over the past four years. He spent more than 50,000 crore to acquire Bhushan Steel and Usha Martin in 2018 and Neelachal Ispat Nigam earlier this year.

Tata Steel also reduced its debt by 40% to 62,869 crore at the end of December 1.05 trillion in March 2020.

Investors tend to value TCS more due to the cyclical nature of Tata Steel’s business. TCS has a P/E ratio of 37.4, while it is 5.19 for Tata Steel.

TCS had a market value of $181.46 billion as of February 11, about nine times larger than Tata Steel’s $20.35 billion.

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