Tata Steel set to pip TCS on profit metric

The steel maker’s turnaround, five years after it posted an annual loss, poses one less worry for Tata Sons chairman N. Chandrasekaran, for now, as the conglomerate looks to make itself future-ready—from combining the group’s consumer brands under a planned “super app" to integrating its acquisition of loss-making national carrier Air India.

Chandrasekaran, whose term was extended by the Tata Sons board for five years on Friday, oversees the sprawling group that comprises 30 companies across 10 verticals with a combined revenue of $103 billion in 2020-21. Tata Steel’s profit totalled ₹31,914 crore in the first nine months of this fiscal through March, higher than TCS’ ₹28,490 crore. Sustaining the run-rate, Tata Steel is expected to end the year with a higher profit than TCS for the first time in 14 years.

Tata Steel’s profit totalled ₹12,350 crore in FY08, more than double of ₹5,026 crore at TCS. That came at the peak of the last commodity cycle and a period when Tata Steel paid $12.2 billion to buy Corus, the Anglo-Dutch steel maker.

Since then, Tata Steel’s journey in the past decade has been a rough ride, with the company reporting losses in FY13, FY15, FY16 and FY17.

Analysts are, however, sceptical if Tata Steel can extend its stellar run to the next fiscal year.

“Since we have crossed the peak cycle in steel, the price trajectory is downwards," Vishal Chandak, an analyst at Motilal Oswal, wrote in a note dated 8 February.

“Once the Olympics and para Olympics end, China may raise steel production and exports to boost the economy that has been throttled by: a) covid-related lockdowns, b) clear sky policy until Beijing Olympic games are over, and c) purported carbon reduction targets. We believe these measures may be relaxed if the Chinese economy continues to slide. This poses a risk to global steel prices."

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

Still, Tata Steel remains confident.

“Steel prices have moderated across key regions, including the Western markets, but continue to remain elevated compared to a year ago. In India, steel demand has begun to improve on the back of continued economic recovery as the third wave of covid pandemic begins to ebb. Overall, while steel prices will continue to be volatile, as seen in the past 12 months, we believe it will trend at a higher level compared to the last 10 years," said a spokesperson for Tata Steel.

The spokesperson said the global steel industry faces rising costs of consumables, raw materials and energy, which have inflated the overall costs. “With increased impetus on greener process routes and inputs, the operating costs will witness pressures. The steel trade dynamics is also changing. Unlike the last decade when countries like China, Japan and Korea were exporting in big volumes, the coming years will see a more balanced steel trade in view of growing concerns around carbon footprint and net neutrality aspirations," the spokesperson said.

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

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

In contrast, Tata Steel has changed its strategy by focusing on the domestic market, having boosted its steel capacity by nearly 10 million tonnes a year in the past four years. It has spent more than ₹50,000 crore to acquire Bhushan Steel and Usha Martin in 2018 and Neelachal Ispat Nigam earlier this year.

Tata Steel has also cut its debt by 40% to ₹62,869 crore as of December-end from ₹1.05 trillion as of March 2020.

Investors tend to value TCS more because of the cyclical nature of Tata Steel’s business. TCS has a price-to-earnings ratio of 37.4, while it’s 5.19 for Tata Steel.

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