When elephants fight, it is the grass that gets trampled goes a saying. The tussle to retain management control over Tata group’s listed companies has seen investors getting hurt. The chart alongside shows that Tata Steel Ltd underperformed the BSE Metal index since 24 October, when the dispute between Cyrus P. Mistry and the Tata group came out in the open. While the publicity has been adverse, doubts arose about whether listed companies may shift course in their strategy.
Tata Steel’s announcement of successfully finding a buyer, the Liberty House Group, for its speciality steels business should put those fears to rest, for now. Monday also saw S&P Global Ratings issue a statement that the Tata group companies are professionally managed, and while decision-making may get delayed, the companies will deliver on their business and financial plans.
The sale announcement by Tata Steel lends some credibility to their belief. News reports had indicated that this sale may be put on hold. This was despite the speciality steel assets in the UK, along with the Hartlepool steel pipes facility, being clearly demarcated as for-sale assets. A reversal could mean going back to business as usual in Europe. Putting the sale on hold would have been a blow to investor confidence.
The September quarter results, for instance, showed an improvement in profitability, which Tata Steel partially attributed to the exit from the long products business, effective 31 May. The full impact was thus visible in the September quarter. Now, output declined as a result by 9% sequentially, but Ebitda per tonne rose by 33%. Ebitda is short for earnings before interest, taxes, depreciation and amortization.
The improvement was not only due to the sale but also other factors such as better spreads and favourable currency movements. The company’s Netherlands facility continues to deliver good results and its focus is to invest more over there.
The UK speciality steel unit employs 1,700 people, of the 11,000 people employed in Tata Steel UK. The enterprise value of the business is £100 million, although details of its turnover or output are not available. However, it is a value-added products business supplying to high-end applications in industries such as aerospace, automotive, and oil and gas. Being a value-added business, its disposal may not be as beneficial to profitability, as the long products’ sale was.
The improvement in the steel industry’s prospects too means its contribution would have improved. Some clarity on this should become visible in the March quarter results, by when the full impact of the sale should be visible. Physical sales are likely to decline but what investors will be watching for is the impact on profitability. Tata Steel’s ability to compensate by higher sale of value-added products from its other facilities could make up for lower sales or profits.
Next in line should be news about the sale of the company’s pipe-making facilities in Hartlepool. That will complete sale of its assets put up for disposal. Once that is done, what remains will largely be its strip products business, where discussions are on for a possible joint venture with ThyssenKrupp AG. Whether this will happen and how long before it is announced is uncertain, but investors can take heart from the fact that its Europe strategy is still on track. That could help narrow the gap between Tata Steel’s share and that of its peers.