 "Brexit impact could push Tata Steel out of Europe")
The Brexit development of last week has acted like a further spanner in Tata Steel's efforts to get rid of loss-making UK business. As if selling of the plant was any easy for Tata Steel since the time the company announced its plan to do so in March amid a hostile business climate, Britain's move has only worsened matters. As buyers will now have to study even the trade ties of Britain with other European countries, certainly the sale process will be further delayed, say experts.
"All this while potential buyers must have looked at the Europe market as a whole, now with Brexit the entire trade equation of Britain with other European countries will change," said Sudarshan Shreenivas, a senior analyst with Fitch Ratings. "This means there will be rethinking, recalculations and renegotiations by buyers, which will in turn lead to a delay in the entire sale process of the plant," he added.
Steel products exported by Tata Steel UK enjoy free trade with other European countries by virtue of Britain being part of European Union. Now with the hive-off, exports from UK will be impacted as trade barriers will come in place, said analysts.
"Agreed that pound will depreciate going ahead but its benefit could be minimal-to-nil in the long term as tariff barriers will nullify the effect," said an analyst with a local brokerage.
Currently, about 12% of steel produced by Tata Steel’s UK operations is exported to the other EU members. Overall European operations contributes about 52 percent to Tata Steel’s consolidated revenue.
"Brexit may delay the sale process of Tata Steel’s UK operations as it will elevate the level of uncertainty within the region. Furthermore, on account of sharp volatility in currency especially the pound sterling, there could be re-negotiations with respect to different aspects of the potential deal," said ICICI Direct in its report.
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Tata Steel UK operations capacity stands at 5.5 million tonne and is currently a loss maker. Apart this facility, the company has business in Netherlands which still remains part of EU and is EBITDA positive. However, reports say that the company is also looking to sell its business at Netherlands and is in talks with Thyssenkrup for the same.
"Netherlands is a more modern asset with younger work force and so it can fetch good value if Tata is selling it," said Giriraj Daga, portfolio manager with SKS Capital & Research.
Netherlands' sale by Tata Steel would mean that the company has almost exited the European market, a business place where Tata believed was the most stable geography to invest in.
In fact one of the reasons for the large Corus acquisition in 2007 was entry into a more mature market which would yield more stable business environment.
Some analysts were of the view that Tata Steel may not exit Netherlands entirely and to that extent would keep some presence in the Europe market.
"Tata steel may sell part stake in Netherlands. Afterall its profit making business and nothing changes for this unit despite Brexit," said Shreenivas of Fitch Ratings.
However, what Tata Steel may remember more profoundly as its association with European market is the debt burden it has taken on the balance sheet post acquisition. As on March 31,2016, Tata Steel's consolidated net debt stands close to Rs 80,000 crore with majority coming from Europe operations.
Analysts are of the view that selling of Europe loss-making assets would largely help Tata Steel avert financial drain due to operating cost. "The debt burden may reduce to some extent not entirely but it would be a one-time hit not continuous drain as in case of a running cost with low revenue (in case of Uk). The debt burden can be managed via India operations," said Daga.
Having refinanced major portion of its debt, Tata Steel has no major debt repayments to be made for the next 2-3 years.
Noting at the sea change Britain is likely go through in coming months, it makes sense for investors to remain in the wait-and- watch mode to see Tata Steel unfold its sale plans.