Tata Steel: Some respite in sight

When Cyrus Mistry took over the reins, Tata Steel’s UK and Europe operations were already seeing profitability pressures. Tata Steel bought Corus (now Tata Steel Europe or TSE) in 2007 under the chairmanship of Ratan Tata. Ever since, TSE has been facing pressure which is a result of the global crisis of 2008 that also led to a big slowdown in Europe. Thus, European operations became a drag on Tata Steel’s overall profitability even as domestic operations did better amid challenges. 

At the end of FY10, Tata told investors that European operations remained underutilised and hence unprofitable. TSE was competing in a high-cost market place with stagnating demand and soft realisations. Corus' Ebitda per tonne fell from $262 in March’08 quarter to $83 in December’08 quarter followed by losses in subsequent three quarters. Although efforts on restructuring, improving efficiency provided some respite, it was not enough. Per tonne quarterly Ebitda averaged $46 between December 2010  and December 2012.

It was at this time, Mistry took over as group chairman (December 2012) after working under Tata for a year. Challenges for Mistry were galore to turnaround TSE primarily and to grow Indian operations. With the commodity downcycle and high debt, problems compounded. Efforts to improve operational capability such as rebuilding blast furnace at Port Talbot  (UK) with fresh investment, product rationalisation etc were taken till FY13. TSE also mothballed some capacities and cut workforce, but the boost to profitability never came. Consolidated debt rose sharply during FY12-FY16.

With no signs of improvement, Tata Steel, in 2016, first divested Port Talbot plant and wanted to exit the loss-making UK business. Mistry, at the end of FY16, told investors that the board of Tata Steel advised its European subsidiary to undertake several structural decisions, most notably, divestment of the long products business in Europe and restructuring others. These actions were critical for the future of UK business, but more was needed to provide a sustainable business going forward, said Mistry.

The Street cheered the divestment of the UK businesses. Analysts estimated European Ebitda to £117 million and £293 million in FY17 and FY18. Deutsche Bank said that it would lead to a sharp improvement in TSE’s margin, providing a strong case for re-rating. Since these major decisions had been taken under Mistry, they have become points of discussion too following his removal. However, analysts are made to understand by the management that there will not be any change in the strategy regarding European assets following Mistry’s exit.

Positively, post-Brexit referendum, the scenario has also changed and talks with German ThyssenKrupp for a joint venture too surfaced.

Benefits are visible as TSE reported an operating profit of  Rs 1,035 crore for September 2016 quarter versus a loss of Rs 147 crore in year ago quarter and Rs 856 crore in June 2016 quarter. The domestic business is also looking up, helped by realisation gain due to minimum import price policy. The new Kalinganagar capacities at Orissa are also driving growth.

Though one may argue that a longer wait would have fetched better valuations for the UK assets, had it not been for the rebound in steel prices the pain would have deepened.

For now, with major decisions taken and rebound in metal prices, all eyes are on Tata Steel’s revival in fortunes. 

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