Tata Steel

How Tata Steel is rethinking its business model…

As the stock markets rallied sharply post the Union Budget gaining over 14% in one month, one stock that stood out was Tata Steel. One can understand the hype around commodities, a global re-rating of steel etc. In case of Tata Steel, it is recognition by the market that the company may be finally putting its follies of the last decade behind…

Paying too much for Corus…

 The problems for Tata Steel began with the buyout of Corus of UK in 2007. At $13.5 billion, Tata Steel had surely paid top-dollar for the company. Additionally, Corus was much larger than Tata Steel and hence the problem of integration was always going to be a challenge. The pension liabilities of the UK operation only added to the burden of Tata Steel. The last straw came when steel went into a global downturn and prices of steel started falling sharply. This was exacerbated by the glut in steel supply from China which accounted for nearly 50% of global capacity. To top it all, the recovery in the UK economy made the UK£ stronger, further impacting steel sales from Corus.

Selling inefficient Corus…

That Corus is an inefficient operation in the overall scheme of things needs no reiteration. A cursory comparison with the Dutch Steel business highlights the point. The Dutch steel business, with a similar production capacity is earning close to half a billion dollars per year, while Corus UK is losing money purely due to a strong UK£ and employee pension liabilities at Corus. Selling off Corus will save Tata Steel nearly Rs.2500 crore per year in hard cash. To understand this in proper perspective one needs to remember that this annual saving is nearly 10% of the market capitalization of Tata Steel.

Focus shifts back to India…

Since the acquisition of Corus in 2007, Tata Steel has become a predominantly European steel company. Currently, it has a capacity of 10 million tons in India and nearly 14 million tons in Europe. Post the decision to sell Corus UK, Tata Steel will be left with 15 million tons capacity in India (post-expansion) and just 6 million tons in Europe. This will ensure that the production capacity of Tata Steel is broadly in tune with the key growth market. After all, India is likely to show the highest growth in demand for steel among the key global economies in the world.

So what we are seeing in case of Tata Steel is a broader re-rating happening with respect to its business model. It is finally getting rid of the Albatross called Corus UK and focusing back on India; the key growth market for Tata Steel. When the annual savings from the sale of Corus are capitalized, the impact on market cap is apparent. It seems to be the beginning of a new story! ©

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