Tata Steel’s decision to sell its long product division in Europe, with the associated distribution activities, is seen as a move in the right direction by analysts.
Yet, views are mixed on the extent of positive impact this might bring in. “From what Tata Steel has mentioned, it seems the long product division should be 4.5-5 million tonnes capacity, 25 per cent of Europe’s capacity of 17 mt,” said an analyst with a foreign brokerage. “But a lot depends on how exactly the company is looking at this division.”
Tata Steel did not respond to any emails sent or to calls. “The division was anyway not doing so well,” said Giriraj Daga, senior analyst with Nirmal Bang Securities.
Last August, Tata Steel had won an order to manufacture 60,000 tonnes of high-quality rail for a new high-speed line linking the cities of Makkah and Madinah in Saudi Arabia. The not-so-good performance of the division is also evident from Tata Steel’s move in FY13, when the company announced a $1.6-billion goodwill impairment charge for the loss of value for Tata Steel Europe (TSE).
Regarding the valuation, Daga of Nirmal Bang said, “Noting the capacity of the division and keeping in mind the enterprise value, I think Tata Steel should look for at least $1.3 bn from the sell-off of the unit.”
“Looking at the broad numbers, it looks like the cash profit that will be made by Tata Steel will be largely sufficient only to service the debt on the books. I do not see much value left for the equity shareholders in this sell-off,” said the analyst with the foreign brokerage. “The move looks positive from the debt reduction perspective.”
Tata Steel’s consolidated debt is about Rs 70,000 crore, of which Rs 40,000 crore ($7 bn) is on the books of TSE. The Europe division has annual capacity of 17 mt, though deliveries are about 14 mt. So, on every one mt delivery, there is debt of $500 million.
“The sell-off will bring down TSE's revenue and operating earnings, and, correspondingly, the debt. But, it is too early to say how the credit profile will look and the impact of this sale on it,” said Sankalp Baid analyst with India Ratings.
“The decision by Tata Steel has nothing to do with the financial health of Tata Steel as a company. Tata Steel is actually in good financial health, with estimates that point towards better financial performance in the next couple of years,” said Sourindra Banerjee, assistant professor at Warwick Business School, who researches Indian conglomerates. “TSE’s decision to sell the division is in line with its strategy to move up the value chain by providing differentiated, innovative and premium steel solutions for its customers.”
Adding: “Such a strategy has upsides and downsides. The upside is higher profitability and greater sustainability in a highly cost-competitive business. The downside is, business units unable to produce differentiated, innovative and premium steel solutions for customers need to be trimmed.”
The 6,500-odd employees at the long products division and its distribution facilities are disappointed, say media reports. They say the way Tata Steel handled the announcement does not reflect well on Tata values. Media reports quoted the Community, Unite and GMB labour unions in a joint statement, “Tata Steel has failed to consult at all with the trade unions before making this move, which could have serious consequences for employees and contractors right across Tata Steel, not just within the long products business that it wants to sell.”
Tata Steel had laid a vision to become a steel company on a global scale through its acquisition of Corus in 2007. With the decisions it has had to take with regard to Europe since then, whereby annuals capacity has reduced from 21 mt to 12 mt now, that plan is losing fizz.
