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Bleeding foreign subsidiaries weigh heavy on Tata Steel

August 20, 2012 16:33 IST

With the economic situation in Europe showing no signs of an immediate recovery, Tata Steel Group is finding it difficult to revive the prospects for its subsidiary, Tata Steel Europe.

The European unit has a total steelmaking capacity of 18 million tonnes (mt) against 7 mt of Tata Steel India. Yet, last year, Tata Steel Europe posted a net loss of $800 million (Rs 4,460 crore on Sunday).

Tata Steel Group managed to remain in black at the end of the year because of the Indian operations which had reported a net profit of $1.3 billion. Tata Steel Thailand and the South African subsidiary, too, did their share to pull down the profits by $42 million and $29 million, respectively.

The situation is no better at the end of the first quarter of the current financial year. Tata Steel's consolidated net profit was Rs 598 crore (Rs 5.98 billion), against Rs 5,347 crore (Rs 53.47 billion) in the corresponding quarter last year.

However, last year, the company had sold off its stake in Riversdale Mining to Rio Tinto for a profit of Rs 3,362 crore (Rs 33.62 billion). Even without that exceptional item in the balance sheet, its net profit was at Rs 1,985 crore (Rs 19.85 billion).

Even when the foreign subsidiaries of Tata Steel continue to bleed, bad news has already started flowing from its stable India operations. Fitch, a rating agency that downgraded Tata Steel to negative outlook, said: "Fitch expects the steel demand in India to be impacted in the near term due to the slowing demand growth in various end-user industries."

Till last year, the Indian operations came to the rescue of the Tata Steel Group and is unlikely that in the current year as well the subsidiaries (Tata Steel Europe, NatSteel, Tata Steel Thailand, Tata Steel KZN SA) will do any better.

Tata Steel India is facing its own problems in India as its profits dipped from Rs 2,219 crore (Rs 22.19 billion) in the June quarter of last year to Rs 1,357 crore (Rs 13.57 billion) in the June quarter this year. The loss after taxes, minority interest and share of profits of associates of the five overseas subsidiaries which include Tata Steel Europe, NatSteel, Tata Steel Thailand, were at Rs 968 crore (Rs 9.68 billion).

It is not the first time that the European operations of Tata Steel suffering.

The company has sold a plant (Teesside Cast Products), mothballed unit (Scunthorpe), shut down a business (Shotton) and cut jobs as part of its efforts known as 'weathering the storm' and 'fit for the future' As we speak, the company is restructuring its long steel business and trying to identify products more suited for the customers with higher margin possibilities.

Tata Sons chairman, Ratan Tata, acknowledged the problem at the Tata Steel annual general meeting when he said no one could have predicted the economic crisis the world faced soon after the company acquired Corus, now Tata Steel Europe.

The real bad news is that the troika of weak markets, lower selling prices for its steel and higher costs of production is unlikely to leave the company for the current financial year as well.

International ratings agencies Moody's and Fitch have put a negative outlook on the company. Moody's believes the steel demand in India will soften as the economy goes through slower growth and the domestic capacity continues to be added. It has put the company on a negative list watch. Moody's has brought down the rating of Tata Steel Europe from a B2 to a B3.

"The downgrade of ratings reflects our expectation of further weakness in the operating environment facing the European steel industry, for which Moody's has a negative outlook," said Alan Greene, a Moody's vice-president and senior credit officer.

"The weak industry fundamentals in Europe, driven mainly by the depressed economic environment in the region, are raising significant challenges for TSUKH, and will likely lead to slower recovery in its operating and financial profile," said Greene, adding, "as such, TSUKH's debt coverage metrics are no longer consistent with the previous B2 rating."

Fitch Ratings also revised the outlook on India-based Tata Steel Ltd and Tata Steel UK Holdings Ltd to negative from stable.

Fitch said: "The Outlook revision reflects Fitch's view that profitability pressures will remain for TSL and TSUKH given the challenging short-term outlook for the global steel market."

This is not good news for Tata Steel.

Shubhashish in Mumbai