MUMBAI (NewsRise) -- Shares of Tata Steel slumped after the company reported a surprise quarterly loss amid weaker demand in Europe and shrinking price of the alloy.
The Tata Group flagship posted a loss of 10.3 billion rupees ($144 million), while analysts polled by Bloomberg were expecting a profit of 210 million rupees. Most of the losses were on account of the company's European business, which grapples with excess supply and weak demand.
Demand in India has also been damped by weak consumer sentiment as Asia's third-largest economy contended with the worst economic slowdown in almost a decade. Still, higher exports helped India sales volume expand 15% in the quarter.
Tata Steel shares declined 5.8% to 443.65 rupees in Mumbai trading on Monday -- their biggest intraday fall in eight months. The benchmark S&P BSE Sensex lost 0.4%.
"Europe is still not out of the woods," PhillipCapital said in a report. The brokerage downgraded the stock to Neutral from Buy, but kept its target price at 485 rupees a share.
"The stock has already run up meaningfully and most of the positives are already factored in," it said.
Last month, rival JSW Steel reported a weaker-than-expected profit, hurt by falling prices and declining construction activities.
To be sure, analysts expect steel prices to improve in the current quarter. Steel prices have been rising across the globe as China curbed its output amid winter shutdowns to curb pollution. The fourth-quarter performance of Tata Steel is likely to improve on the back of higher realizations, PhillipCapital said.
The company expects domestic prices to be higher by 3,000 rupees per ton sequentially as India presses the pedal on investments to spur its economic growth. The federal government aims to spend $1.4 trillion on infrastructure as part of its plan to be a $5 trillion economy by fiscal year 2025. Steel will account for 60% of the contribution of infrastructure sector spending, according to government officials.
A partial recovery in steel spreads should help the company break even at an operating level in Europe in the fourth quarter, Kotak Institutional said in a report. Tata Steel also expects its cost reduction initiatives to start yielding results gradually over the next four quarters.
"We expect Europe to achieve cash breakeven in fiscal year 2020 on a full year basis," Kotak said.
Tata Steel entered Europe through the purchase of the U.K.'s Corus Group for 6.2 billion pounds ($8 billion) in 2007. However, it has been grappling with losses in its European business triggered by the cutthroat price competition from Chinese rivals.
Its attempt to merge the European steel operations with Germany's Thyssenkrupp was thwarted by the competition regulator last year. In November, the company announced a plan to lay off 3,000 people across its European operations.
--Dhanya Ann Thoppil