 "Pension liabilities deal positive for Tata Steel")
With Tata Steel and trade unions of its UK plants agreeing on shifting to a 'defined contribution' pension scheme, resolution seems close. Importantly, company will be able to focus on profitability of operations, which have been a drag on the consolidated financials of Tata Steel.
The company's efforts at streamlining and improving profitability of its European operations seem to show progress. Though Tata Steel had earlier explored selling its loss-making UK assets and even sold its Scunthorpe plant, it could not complete the divestment of Port Talbot plant as the UK public decided to exit European Union in a referendum. After that, the company has been working towards a joint venture with German steel firm ThyssenKrupp. With pension liabilities seen as the main stumbling block, the new deal will help things.
In the new scheme, the company's liabilities will reduce and stay limited to fixed annual payments linked to contributions from employers and employees unlike before when company was required to fund beyond contributions. The 'defined contribution' scheme is said to see maximum 10 per cent contribution from the company and six per cent from employees. Thus, the company's liabilities will be limited to the level of contributions, seen as necessary given the declining profit and thinning margins of the European business.
However, in order to clinch the deal with trade unions, the company has promised a minimum five-year commitment to keep operational two blast furnaces and is also committed to a 10-year £1-billion investment plan to support steel-making at its largest UK-based Port Talbot plant. However, this could be partly taken care of, if it ropes in a partner.
Reacting to the development, analysts at Kotak Institutional Equities said de-risking of pension liabilities from steel-making operations will improve the prospects of a joint venture with ThyssenKrupp or of other strategic tie-ups. The steps towards improving competitiveness of Europe operations remain key for analysts' positive views on the stock, which closed 4.7 per cent higher on Thursday at Rs 431.55.
Notably, in the domestic operations, note ban is seen as a temporary blip, and prices are largely stable. In Europe, too, the outlook is steady on import restrictions, which have helped demand and prices, leading to better profitability for Tata Steel Europe.