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Going ahead, repayment of debt may get tougher for Tata Steel, the country's oldest alloy producer. A weak outlook for steel prices amid dull demand is expected to lay pressure on the company at a time when it is saddled with a consolidated net debt of Rs 69,000 crore as on March 31.
"Deleveraging is certainly going to remain slow for the company going ahead as earnings are seen under pressure due to lower steel prices and low visibility on any rebound," Abhisar Jain, senior analyst with Centrum Broking said.
The Tata Group flagship company reported disappointing results for March quarter as it moved into losses due to sharp fall in revenues and also because of a non-cash impairment of Rs 4,951 crore it took, on Europe's long products division. Even without an impairment charge, the company's performance was a dismal in the period under review as consolidated revenues dropped 21 percent on year-on-year basis.
With a total capacity of about 28.4 million tonne and despite operations spread over three geograhies, India, Europe and South East Asia, the company is unable to see any clear-cut bullish trend in any of these markets.
"PMIs (purchasing managers index) of key steel sectors continue to indicate lower levels of growth. Due to this, demand growth for steel is also seen slower. Given all this, FY16 look tough for Europe," Karl Kohler, managing director and chief executive officer of Tata Steel Europe said at the earnings conference.
In India, where the PMI in the quarter gone by dropped to 52 from 54.5 in the December quarter, T.V. Narendran, managing director for India and South East Asia operations said while demand for steel from the auto sector is looking mixed, normal monsoons are also critical for steel demand to pick up from the rural segment.
For South East Asian operations, however, Narendran sees steadiness in this market, even as it remains plagued with Chinese imports, just as the India steel market.
Overall too the management remained concerned over China's continued imports into India and South East Asia.
Tata Steel Europe contributes over 60 per cent to the parent's consolidated revenue, while its South East Asian operations pool is a little over a tenth of its consolidated revenues.
"The company has recently refinanced its debt. So I think, it will remain comfortable for a few years and go in for another refinancing round. This perhaps could be the route taken by the company going ahead in order to cut its debt," said an analyst with a foreign brokerage.
Some brokerages were positive on debt reduction strategy of the company. "Our net debt estimate for FY17 is 11 percent lower to Rs 74,300 crore from previous estimate of Rs 83,700 crore due to better cash flow management in FY15 (primarily at other than India businesses) on account of working capital release and capex cut to Rs 10,000 crore each in FY16 and FY17 from Rs 12,500 earlier," Motilal Oswal said in its report.
Though selling of non-core assets could be an option the company could exercise as it has in the past, most analysts were of the view that sale of assets in a not-so-bullish market is difficult.
"There is no complete list of the non-core assets Tata Steel has but in a business climate so dull, it will be difficult to sell such assets. However, it can surely look at this option as it has done in the past," said an analyst with a local brokerage. Last year, Tata Steel sold its Borivali unit land for Rs 1,100 crore.
"Reducing shareholding in some of its group companies could also be an option Tata Steel could mull," said the analyst with foreign brokerage.
Meanwhile, the company's three million tonne Kalinganagar plant expected to commission in the second half of the current fiscal could be seen as a positive, said analysts.
Capacity expansion at Kalinganagar and its strong market positioning can drive Tata Steel India sales volume to 11.2 million tonne by FY17 from about 8.7 million tonne in FY15, said Motilal Oswal.
While brokerages are suggesting options outside business to lower the company's debt, the management seems to see the positive side of the scale.
"Once Kalinganagar production begins, we plan to cater to the oil&gas sector, which we havent so far. This will open a new market for us," Narendran said.
"Our strategy for Europe would be to focus on strip products, exit long products, reduce costs and restructuring of pension plan to defined contribution," said Karl.
"We reiterate sell in Tata Steel with a target price of Rs 240," said Centrum brokerage in its report.
