The stock of Tata Steel closed 0.47 per cent lower at Rs 303.90 on Tuesday following the company’s statement on Monday that it would take a non-cash write-down of the goodwill and assets in the consolidated financial statements for the year ended March 31, of around $1.6 billion.
According to steel analysts, the announcement was a non-event for the market and despite the initial knee-jerk reaction of the stock taking a hit, it managed to close at less that 0.5 per cent.
Sanjay Jain, Analyst, Motilal Oswal Financial Services, said: “The announcement essentially means that the net worth has gone down on the liabilities side and accordingly goodwill has got reduced so the only impact would be on reducing the size of the balance sheet of Tata Steel.
“Banks do not consider net worth as a measure to extend loans and it does not affect the company’s debt governance. We maintain a sell call on the stock with target price of Rs 279.”
‘Accounting entry’
“This goodwill write-off is a non-cash item and basically an accounting entry which will not impact the company’s operationally or balance sheet wise. It is more of a revaluation of the goodwill. We continue to maintain a ‘reduce’ rating on the stock with a target price of Rs 290,” added another steel analyst with a leading brokerage.
Global rating agency Moody’s also stated that Tata Steel’s decision to write off $1.6 billion (over Rs 8,700 crore) in goodwill will not have an immediate impact on its credit rating, although the move highlights the continued poor performance of its European unit.
“The announcement highlights the structural challenges in the European steel market and the continued poor performance at Tata Steel UK Holdings which are incorporated in both entities’ negative rating outlooks.”
According to Moody’s, the burgeoning debt level remains a challenge for the Tata Steel group and funding constraints have emerged, affecting the expansion of the group. However, it added it would be looking at the company’s upcoming full-year results announcement on May 23 and subsequent quarters to ascertain whether a gradual turnaround of Tata Steel Europe’s performance can be achieved.
Tata Steel, which had debt of $10.54 billion (Rs 57,981 crore) as of December, had said that demand in Europe has fallen by 8 per cent in 2012-13 and almost 30 per cent since the emergence of the global financial crisis in 2007.
“This condition is expected to continue over the near- and medium-term, and has led to the downward revision of cash flow expectations underlying the valuation of the European business,” said a Tata Steel statement.
manisha.jha@thehindu.co.in