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Brexit is Tata Steel's additional headache

By Aditi Divekar
June 27, 2016 09:10 IST
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Brexit

Tata Steel UK operations’ capacity is 5.5 million tonnes a year and currently a loss maker.

The Brexit last week has acted as a further spanner in Tata Steel’s efforts to get rid of its loss-making UK business.

The sale was never easy since the March announcement, in a hostile business climate.

Now, any potential buyer will have to also study the trade ties of Britain with other European countries.

“All this while, potential buyers must have looked at the Europe market as a whole.

"With Brexit, the entire trade equation of Britain with other European countries will change,” said Sudarshan Shreenivas, senior analyst with Fitch Ratings.

Products exported by Tata Steel UK enjoy free trade with other European countries, Britain being part of the European Union.

With the hive-off, exports from UK will be impacted as trade barriers come in place, said analysts.

“The pound will depreciate but its benefit (in making export prices cheaper) could be minimal to nil in the long term as tariff barriers will nullify the effect,” said an analyst with a local brokerage.

Currently, about 12 per cent of what is produced by Tata Steel’s UK operations is exported to the other European Union members.

Overall, the European operations contribute 52 per cent to Tata Steel’s consolidated revenue.

“Brexit might delay the sale process of Tata Steel’s UK operations, as it will elevate the level of uncertainty within the region.

"Further, on account of sharp volatility in currencies, especially the pound, there could be re-negotiations with respect to different aspects of the potential deal,” said ICICI Direct in a report.

Netherlands

Tata Steel UK operations’ capacity is 5.5 million tonnes a year and currently a loss maker.

Apart from this, the company has business in The Netherlands, part of the EU and with positive operating earnings.

However, reports say the company is also looking to sell its business there and is in talks with ThyssenKrupp for this.

“Netherlands is a more modern asset with a younger work force and can fetch good value if Tata is selling it,” said Giriraj Daga, portfolio manager with SKS Capital & Research.

Sale here by Tata Steel would mean the company had almost exited the European market, a business place Tata believed was the most stable geography to invest in.

One reason for its large Corus acquisition in 2007 was the prospect of entry into a more mature market, yielding a more stable business environment.

Some analysts felt Tata Steel might not entirely exit The Netherlands, keeping some presence in the Europe market.

“Tata Steel might sell part-stake in Netherlands. After all, it’s a profit making business and nothing changes for this unit despite Brexit,” said Shreenivas of Fitch Ratings.

Debt drain

However, what Tata Steel might remember more profoundly as its association with the European market is the debt burden it has taken on the balance sheet after its acquisition.

As on March 31, consolidated net debt was close to Rs 80,000 crore (Rs 800 billion), the majority from Europe operations.

Analysts feel selling of the loss-making European assets would largely help Tata Steel stop the financial drain due to operating cost.

"The debt burden might reduce to some extent, not entirely.

"But, it would be a one-time hit, not a continuous drain as in a running cost with low revenue (in the case of the UK).

"The debt burden can be managed via India operations," said Daga.

Having refinanced a major portion of its loans, Tata Steel has no major debt repayments to be made for the next two to three years.

That apart, noting the sea change Britain is likely go through in the coming months, it makes sense for investors to remain in a wait-and-watch mode as Tata Steel’s unfold its sale plan.

Image: A vote leave supporter holds a poster in Westminster, London. Photograph: Toby Melville/Reuters

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Aditi Divekar in Mumbai
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