Tata Steel Ltd’s March quarter was solid, largely due to the steady performance of its European operations and of Tata Steel BSL Ltd. But FY21 will be challenging as demand remains tepid while the company has only begun ramping up production. Shares of Tata Steel were up 4.4% in early trade on Tuesday, reflecting the improvement in operations.

While Q4 revenues declined slightly on account of lower sales volumes and lower price realisations, the figures were steps ahead of analysts’ expectations. While sales volumes declined about 13.6% y-o-y, volume growth was higher than Street estimate. In fact, volume show was quite impressive. Overall revenues were about 10% ahead of the estimates.

Lower costs and better operational performance from its European and domestic steel operations also led to a decent Ebitda performance, considering the covid-19 impact. While fourth-quarter Ebitda fell about 38% y-o-y, it still outpaced investor expectations. The improvement in realisations sequentially added some tailwinds to the performance, which is good. Ebitda is earnings before, interest, tax, depreciation and amortization.

But the coming months will be challenging because of the slowdown in the Indian economy, even as the company ramps up its capacities. The management said capacity utilisation is beginning to steadily improve. The company is operating at about 70-80% capacity now, and will be operating at full capacity in July.

Domestic demand from the auto construction sectors remains tepid, and is likely to ramp up only in the second half. One positive is that the company has cut back its capital expenditure plans during the current year by about half. This will reduce stress on cashflows.

Besides, exports are cushioning the impact of the slowdown in the first quarter. During the lockdown, exports of steel products increased as demand from overseas has been steady, particularly from China.

However, higher operational costs for the steel industry could keep the performance subdued in the coming year. Another worry is rising levels of net debt, which according to analysts has increased to about 10% to over ₹1 trillion in FY20.

While servicing the debt would not be an issue, increase in debt levels will lower cash flows. The company has already seen lower free cash flow during FY20 compared to FY19.

Analysts have cut FY21 earnings considerably and that could put pressure on the stock in the coming months. The Tata Steel stock that fell considerably in the covid-19 sell-off in 2020 has since seen a recovery and is down about 29%.