Tata Steel: Gaining strength

Last week, Tata Steel sold off its loss-making long products Europe business to Greybull Capital for a nominal amount of £1. With this, the company has begun exiting its ailing UK business — which has been bleeding the company red since it took over the Anglo Dutch steelmaker Corus in 2007 — in a big way.

The sale includes Scunthorpe Steelworks, two mills in Teesside and an engineering workshop in Workington. While Tata Steel’s debt remains unaffected, the deal will help the company pare its operational losses and is therefore a positive.

Tata Steel is also looking for buyers for its remaining facilities in the UK, including the integrated steel plant at Port Talbot. The sale of the remaining UK business, when it goes through, will further reduce the company’s losses. For the nine months ending December 2015, the Indian business reported net profit of ₹4,224 crore. However, dragged down by the European operations, the company’s consolidated profit was only ₹164 crore during this period.

It’s no surprise then that the stock of Tata Steel has gained 9 per cent since end-March when the company announced its decision to explore options for sale of its UK business.

At ₹332, the stock trades at 0.9 times its trailing 12-month consolidated book value, lower than its five-year historical average valuation of one time. Investors can consider buying the stock.

The sale of the UK business will provide relief to the company’s ailing financials. Apart from that, Tata Steel’s capacity expansion in the profitable (though less than before) Indian market and the import protection measures by the Indian government too should help.

Of Tata Steel’s crude steel capacity of over 18 million tonnes per annum (mtpa), two-thirds is in Europe. Its European business includes three large integrated steel plants at Port Talbot and Scunthorpe in the UK and at Ijmuiden in the Netherlands and other facilities across Europe. While the European business contributes 60 per cent of the company’s revenue, it has been incurring losses. For the nine months ended December 2015, Tata Steel Europe reported an operating loss of ₹240 on every tonne of steel sold.

Tata Steel did not realise any money on the recent part-sale of its UK business. Something similar cannot be ruled out for the sale of the remaining UK business too. But, while the company may not recover the money invested, an exit from the UK operations bodes well for its profitability. This is especially because cheap Chinese imports continue to pose a threat and domestic steel demand in Europe remains tepid.

The European business has also been a big contributor to the company’s debt. As on March 2015, Tata Steel had consolidated debt of ₹69,300 crore — about a third of it came from the European business. By end-September 2015, the company’s consolidated debt had grown to ₹71,799 crore. While the debt is substantial, Tata Steel’s efforts at debt refinancing should provide some comfort. It refinanced debt worth $1.5 billion in December.

While Tata Steel is winding up its UK business, it is expanding in India. It expects to commission the first three-mtpa phase of its six-mtpa Kalinganagar steel plant in Odisha, this fiscal. The plant which will run on captive iron ore, will manufacture high-end flat products.

Tata Steel is on a stronger footing in India, for two reasons. One, unlike in Europe, Tata Steel has access to captive mines to meet its entire iron ore requirement. Two, compared with the other big steel consuming countries, the Indian steel market looks better; the thrust on infrastructure sector is expected to spur steel demand.

A host of import protection measures introduced by the Indian government too should provide support to domestic manufacturers.

Measures such as imposition of 20 per cent safeguard duty (which has now been extended, with phased reduction up to March 2018) in September and introduction of minimum import prices on a wide range of steel products in February should help.

According to the World Steel Association, while global steel demand is predicted to contract 0.8 per cent, Indian steel consumption is expected to grow 5.4 per cent in 2016.