Tata Steel write-down: Is it too little, too late?

Impairing Rs 8,700 cr means the book value of Tata Steel will come down by 20%

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Tata Steel has said it has decided to write down goodwill and assets worth $1.6 billion, primarily due to the weaker macroeconomic and market environment in Europe. Is this impairment inadequate and too late?

“It’s a start,” said Rakesh Arora, managing director and head of research, Macquarie India. “They bought Corus, now Tata Steel Europe (TSE), for $13 billion and the company is definitely not worth that now. After selling off assets and this impairment of $1.6 bn, TSE is still not worth $10 bn. It is worth much less.” An analyst from Edelweiss, seconded Arora. “This move was anticipated for a long time but, yeah, too less. We don’t take goodwill in our calculations, anyway,” he said.

Tata Steel is carrying goodwill worth Rs 17,543 crore  in its balance sheet and analysts say the $1.6 bn (Rs 8,700 crore) write-off is too little. The analyst from Edelweiss said the company should have written off the entire goodwill in its books. Arora added, “The write-down should have been for the entire goodwill but at this point in time, we don’t know what logic the company has used in arriving at the $1.6 bn figure.”

Ritesh Shah, lead analyst, metals & mining, at Espirito Santo Securities (India), said: “The write-down is on expected lines, though we expected a much larger number (over $1.6 bn).  We expect (the) Tata Steel (stock) to remain range-bound, with no triggers in sight. A bloated balance sheet, lack of clarity on carbon issues, weak European macro, further write-downs, etc, are key concerns for the stock.”

In a 2009 report, Morgan Stanley had written that if Tata Steel decided to deduct the goodwill of Corus, then its adjusted book value would be Rs 15,904 crore, a drop of 53 per cent. The current net worth of Tata Steel is Rs 43,000 crore and impairing Rs 8,700 crore means the book value of the company will come down by 20 per cent.

Tata Steel said demand had fallen eight per cent in 2012-13 and almost 30 per cent since the emergence of the global financial crisis in 2007.  It said, “The above underlying condition is expected to continue over the near and medium term, and has led to the downward revision of cash flow expectations underlying the valuation of the European business.”

Alok Kumar Nemani and Indrajit Yadav of Nomura Equity Research, in a report dated February 14, said TSE was expected to achieve sales volumes of 13.2 million tonnes in FY13, less than FY12.

It further estimated that till FY16, the company would sell less than 14 mt steel every year. The net profit of Tata Steel, according to Nomura, would remain negative till FY16.

The company said the impairment includes write-downs from its assets in the ferrochrome business in South Africa and the mini blast furnace in Tata Steel Thailand, impacted by the high cost of raw material.

The company did not give a breakup of the write-downs, saying this would be done on May 23, the day it announces its full-year results.

The write-off will adversely affect the debt to equity ratio. At the end of the third quarter dated December 31, this was 0.9. According to a February 14  report by Goutam Chakraborty and Prince Poddar of Emkay Research, the net debt to equity ratio was expected to worsen to 1.3 in FY13.

Due to this impairment, the ratios are likely to go down further. Arora, too, said the equity of the company had got eroded and debt covenants would go up.

Tata Steel, however, states otherwise. The company said, “The company's financial covenants are unaffected by the above non-cash write-down of goodwill and assets.”