Tata Steel’s June-quarter results reinforce its obsession with adding capacity in the domestic market. They also exemplify why investors are concerned to know about how the company goes this and the interim impact on its financials.

Tata Steel’s gross debt as of 30 June has risen by 26.6% to RS.1.17 trillion compared to its 31 March levels. The chief contributor is the debt addition due to the Bhushan Steel Ltd acquisition.

It’s obvious, Tata Steel has cash and equivalents of RS.13,086 crore, but this too has come down from RS.22,932 crore as of 31 March.

The business makes a low sound and Bhushan Steel’s contribution steps up, the cash balance will move up. But then, Tata Steel has its sights on Bhushan Power and Steel Ltd—where it may now have to pay more than it expected earlier.

The further debt will be added in the company’s books and it may have two assets with a good potential for the long term but they will need to do a lot of work in short to the medium time limit.

Tata Steel shares down so far in 2018, as the above point could be the main concern for pulling it. In the 3 months ended 30 June, the company’s consolidated volume sales increased by 12.3% from a year ago, per tonne realizations rose by 8.7% and its Ebitda (earnings before interest, tax, depreciation, and amortization) increased by 32.8% to RS.6,559 crore. be the main concern for pulling it.

But the real narration is the contribution to this Ebitda. The India stand-alone steel business contributed 78% of this Ebitda, although, in the country, realizations rose by a relatively slower 5.3%. The rest of the group, including its European and South-East Asian ventures, and some smaller domestic subsidiaries too, contributed to the remaining 22%.

As of now, India accounts for only 45% of the group’s sales by volume. It means, Tata Steel adds to domestic volumes, once these operations stabilize, its profitability should leap.

Of course, assumes that all stays well with the domestic steel industry. The indications are good. Steel demand grew by about 9% in the April-June quarter and the Tata Steel management said that the current quarter is usually a seasonally weak one and is seeing good demand.

The acquisitions bring another problem. While the Ebitda growth was healthy, depreciation and interest costs have risen too, and the full impact will be visible in the current quarter, since Bhushan Steel’s acquisition was effective 18 May.

Also, India and Europe both saw their Ebitda improve, adverse non-cash foreign exchange movements of companies that do the financing of the company’s South-East Asian operations affected Ebitda. Others (which include these entities) reported a loss of RS.400 crore compared to a profit of RS.743 crore a year ago.

This meant that Tata Steel’s combined Ebitda has come in a bit lower than what the Street had pencilled in. Since the miss is mainly due to non-operational reasons that are not likely to sustain, investors may not mind it as much. Its profit before tax and 1-time items increased by 46.2% over a year ago but declined by 11.7% sequentially.

The steel of the company continues to do well. As the steel prices are showing a good firm trend, so the conditions in India and Europe are looking well. The main concern that investors will have is the point when Tata Steel will say no to more acquisitions and consolidate what it has already acquired.

The effects of taking debt will be felt until offset by the cash flows from the acquired assets when their performance improves in their long run.

The company’s debt position will also comfort a bit once the joint venture with ThyssenKrupp AG becomes effective.

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