Tata Steel: After cutting flab, gains show

When Anglo-Dutch steel maker Corus (now known as Tata Steel Europe) was acquired by Tata Steel in 2006, there were many reasons to cheer. Then, the acquisition was considered a game-changer for Tata Steel in terms of providing scale, diversification and access to new technology and value-added products. The acquisition provided ready access to huge capacity which otherwise would have cost much more money and time if done through the organic route. After the acquisition, Tata Steel's total capacity increased significantly making it the fifth largest steel maker globally in terms of size. However, the celebration did not last for long.

After the world economic slump in 2008-2009 and particularly the crisis in the European economies in 2009-2010, demand in the region fell significantly. Both, domestic and international steel prices crashed to multi-year lows, hitting the company in terms of realisations and profitability. Corus in particular suffered because of the severe pressure on demand for its value added products and because of its non-integrated operations leading to losses at the operating level. The capacity utilisations gradually fell and fixed expenses, such as employee and interest costs, started to take a toll on Tata Steel's consolidated performance.

Most analysts believe the timing of the acquisition and debt funding was a key issue. However, some of these issues are resolving as demand and steel prices have off late started to improve in the European region. Also, aggressive cost cutting, monetisation of assets, product rationalisation, recent increase in the capacity utilisation and partial gains in terms of integration are now helping Tata Steel to realise the benefits of synergies and scale. Tata Steel has also taken other measures like writing off impaired assets and goodwill in the past. All these suggest the painful days are behind.

Notably, any incremental improvement on these counts (demand, pricing or costs), because of Tata Steel Europe's size, could have a huge impact on Tata Steel group and the benefits of acquisition will start to reflect. Analysts say the European operation is already reaching the breakeven point, which is good news as this will have a positive impact on earnings of the consolidated entity. In FY13, the European operations made an Ebitda of $11 per tonne which has improved to $43 per tonne in third quarter of the FY14.