After Tata Steel's big losses, shareholders could ask if it's time to sell Corus | Mint

After Tata Steel's big losses, shareholders could ask if it's time to sell Corus

Tata Steel has continued to express concerns regarding the sustainability of its European business, citing insufficient cash flow and liquidity. File photo:: Paul O'Driscoll/Bloomberg News
Tata Steel has continued to express concerns regarding the sustainability of its European business, citing insufficient cash flow and liquidity. File photo:: Paul O'Driscoll/Bloomberg News

Summary

  • The company's thriving Indian operations and the struggles in Europe present a stark contrast

Tata Steel's substantial net loss of 12,560 crore in the second quarter of fiscal 2024, mainly attributed to the restructuring efforts in its UK and mainland Europe steel operations, raises questions about the company's strategic view and intent on its European business.

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(Graphics: Mint)

Tata Steel faced a dual challenge, marked by impairment charges and restructuring provisions related to its UK business. Its other challenges include overcapacity, economic uncertainties, high fixed costs, legacy liabilities, and trade tariffs. Economic factors, such as fluctuating demand and Brexit add to the complexity. High fixed costs and legacy liabilities are difficult to reduce in the short term, and trade tariffs impact exports and imports.

The company has continued to express concerns regarding the sustainability of its European business, citing insufficient cash flow and liquidity.

Tata Steel's thriving Indian operations and the struggles in Europe present a stark contrast. While India maintains a healthy profit margin, Europe lags behind.

A significant portion of the impairment and restructuring costs pertained to the decarbonisation project undertaken in the UK as part of a £1.25 billion investment with the UK government.

This initiative involves the establishment of a 3 million tonne electric arc furnace (EAF) at the Port Talbot facility, designed to replace existing carbon-intensive assets. As a result, Tata Steel decided to impair these heavy-end assets, incurring an impairment charge of 2,631 crore.

The transition to EAF technology is expected to yield substantial savings, including carbon cost reductions in the range of £50–60 per tonne. To support this endeavour, Tata Steel intends to invest £750 million in the EAF project, complemented by a £500 million grant from the U.K. government, with the plant slated to become operational within 36 months. Additionally, the company made provisions of 2,425 crore for restructuring expenses, encompassing potential asset closures and redundancy costs.

Tata Steel also accounted for provisions amounting to 1,187 crore, specifically related to past service costs associated with the British Steel Pension Scheme (BSPS). This decision followed the completion of an insurance buy-in for the BSPS during the previous quarter, thereby reducing the pension-related risks for Tata Steel U.K., the primary sponsor of the pension scheme. One would remember that Tata Steel's attempt to merge with the German entity Thyssenkrupp failed, chiefly due to the substantial pension obligations associated with the German company. So is this an indicator of preparation for a fire sale of the European segment?

The UK business has been a millstone around its neck. Since the acquisition of Corus Plc (now, Tata Steel Europe) for $12 billion in 2007, Tata Steel has grappled with the challenge of revitalising its operations, initially due to widespread influx of competitively priced steel imports from China. The British government, cognisant of sustainability objectives, was reluctant in extending support for coal-based steel production. Concurrently, issues pertaining to the unavailability of gas resources and the escalation of energy costs posed additional obstacles.

The Corus acquisition did bolster Tata Steel’s total production capacity to 18 million tonne of which Corus produced 10 million tonne. However, the UK business' production has since dwindled to 3 million tonne, while Indian operations now boast an annual production capacity of 21 million tonne. Ever since its acquisition, there have been struggles, not just financial ones. It struggled with pricing power in the market. Then the company faced labour struggles, which it later overcame.

Tata Steel successfully executed a substantial deleveraging strategy between fiscal years 2020 and 2022. From its peak of approximately 1 lakh crore in FY20, the net debt has been nearly halved to 51,049 crore (March 2022). Tata Steel's successful debt reduction and ambitious plans to expand its Indian production capacity to 40 million tonne by 2030, indicate a clear strategic shift towards prioritising the Indian market.

One is mindful of the long economic cycles of commodity businesses such as steel. But for shareholders, the continued pain, on account of a potential deadwood in the portfolio, makes it impossible to swallow steel. Shareholders cannot but wonder whether the European business is a sustainable and profitable venture. Is this another pet project akin to the Nano? But then, at what cost to non-promoter shareholders?

The persistent pain and constant right-sound-byte signaling about concerns around the European segment need a closure, and it is crucial to determine the path forward. The question that one confronts is- can it have a sustainable and profitable existence? If so, how much more time and precious capital would be needed? After all, in business, success is not solely determined by knowing when to enter a market or business, but also by the wisdom of knowing when to exit. They can’t just make steel, they need to make sustained profits too.

Disclaimer: This is not an investment advice. Please refer to a registered investment advisor before taking any investment decision.

Srinath Sridharan is a policy researcher & corporate advisor.

 

 

 

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