The Corus factor pulls Tata Steels down

Bumper Q4 production fails to interest investors.

By R. Chandrasekaran

Though one of the biggest steel companies in India Tata Steel delivered a bumper production in the fourth quarter, it failed to get the investors’ attention as it could manage only a slender gain of 0.36 percent at the end of trading in Bombay Stock Exchange, whereas the 30-share barometer advanced 1.03 percent, today.

One of the primary reasons why investors’ continue to shy away from the counter is the big debt burden of approximately $10.5 billion, most of which was taken primarily to fund the United Kingdom-based Corus Group acquisition some six years back.

Though reports indicated that Tata Steel may consider selling off a unit in the Britain factory ostensibly due to weaker economy hurting the demand thus leaving little scope to use its capacity at least to a reasonable level, it failed to satisfy Indian investors.

Currently, the factories in the U.K. are grossly underutilized as a fall out of debt crisis in the region that resulted in crippling of the economy. The current situation only increases its operating costs as the over capacity continues to prevent the steel makers from passing the rising input costs to consumers.

On Wednesday, Tata Steel announced that it produced saleable steel of 2.26 million tons during the fourth quarter ended March 2013 compared to 1.77 million tons in the previous year quarter representing a growth of 27 percent. Both hot metal and crude steel recorded an upside of 25 percent and 26 percent, respectively. Significantly, sales vaulted 29 percent over the same period.

For the fiscal year ended March 2013 too, the company could produce saleable steel of 7.94 million tons, up 14 percent from 6.97 million tons in the last year. Interestingly, Tata Steel’s U.K. assets have a capacity of 10.6 million ton per year. While the normal market demand in Europe is projected between 150 million tons and 160 million tones, steel companies have a capacity of approximately 210 million tons per annum.

About six years ago, Tata Steel bought Corus for $12 billion in an effort to expand its footprint and position itself as one of the top steel makers in the world. However, it has divested one of units of Corus, Tesside Cast Products to Sahaviriya Steel Industries, a Thailand-based company, for $469 million in February, 2011. Last year, Tata Steel also disclosed its intention to reshuffle its Britain units.

While the Indian steel major has been selling some of the units to reduce its debt burden, the third quarter ended December 2012 witnessed losses widening to Rs.7.63 billion from Rs.6.03 billion in the preceding year.

Obviously, the mounting loss in the absence of better price realization and increased input costs reduce the interest on Tata Steel currently. But once the debt burden gets reduced, it will be back in the investors’ favorite list.

To contact the author, e-mail: rchandrasekaran@americanbazaaronline.com

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