Tata Steel – Understanding the Strategic Realignment

The decision to call-off the joint venture with ThyssenKrupp is quite a setback for Tata Steel trying to reduce its global exposure. Yet, it is an interesting phase for the company with series of developments reflecting the strategy shift. The focus is shifting back to domestic production in contrasts with the global expansion undertaken during 2004-07. Here is a look at the developments and their impact on the company.

Tata Steel entered the map of global steel producers with almost two-thirds of its revenue coming from global businesses. However, it was never comfortable with its global acquisitions; eventually leading to the decision of divesting them sometime around 2015. However, that was the trough in the steel business cycle which sharply eroded the value of assets on block. After a series of failed negotiations due to prevailing industry conditions, company eventually sold a part of the asset for a nominal sum of €1 in April 2016. The assets at Scunthorpe with 5 mn tons of capacity had estimated value of about $1.4 billion just about two years back. Yet, the sell-off was prudent as the company was making significant operational losses by running them. The sale made earlier sale of Teesside plant in 2010 with 3 mn tons capacity at $500 million look much better. (The Teesside plant was eventually closed down in 2015 after the bankruptcy of its buyer).

The second phase of global divestment involves sale of its South East Asia (SEA) business comprising of assets in Singapore, Thailand and Vietnam. The company had acquired these assets close to the peak of the business cycle and could not make money out of them. The businesses, purchased around 2004-06, accounted for just about 7% of its sales and had negligible share in profits. Company has entered into an agreement to sell these businesses in January this year. This involves transfer of assets into another entity including about Rs 700 crore of debt. Tata Steel would receive close to Rs 2,300 crore and would also hold 30% stake in the entity. The consideration involved implies that it has managed reasonable value from these assets in contrast with the UK sale.

Undaunted by its failure in global businesses, company remains a risk seeker in the domestic space. This was demonstrated by the purchase of Bhushan Steel through NCLT involving substantial sum of Rs 35,000 crore. The purchase of Bhushan Steel was tricky since such assets, coming through bankruptcy, carry certain degree of surprises. Bhushan Steel has a capacity of 5.6 mn tons and the plant is quite efficient as reflected in the turnaround achieved after its purchase. The reason for insolvency was high level of loan, probably a result of malpractices by the earlier promoters including diversion of loan which are being investigated. With its domestic expertise and network, Tata Steel managed to turnaround the company which recorded EBITDA of over Rs 11,000 per ton for quarter ended Dec’18, not very far from EBITDA of about Rs 16,000 per ton for the core domestic business and much higher than that of European business at Rs 4,000.

Result of all these transaction, Sale of high cost global assets at negligible price and domestic purchase, has affected company’s balance sheet. The company had to reduce the value of its global assets and write-off nearly Rs 16,000 crore during FY15 and 16. This reduced its equity capital to less than Rs 30,000 crore at the end of FY16. It came with a right issue of Rs 12,800 crore in FY18 which helped take the capital base to Rs 62,000 crore, double what it was two years back. Yet, it has a very high level of debt at over Rs 1 lakh crore at the end of FY19, partially a result of additional borrowings to fund Bhushan steel purchase. It hoped to transfer Rs 20,000 crore of this to the JV which now stands cancelled. Considering the current state of European steel industry, it would be difficult for the company to find a new partner. So, Tata Steel would have to preserve the cash generated from domestic business until the market conditions improve. (Read more on Tata Steel here – https://www.indiaeconomyandbusiness.com/corporate-analysis-tata-steel/)

(Image source – Company website).

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