Tata Steel: Easing of debt likely to be slow

In dull market, earnings might stay muted; analysts say can sell non-core assets, lessen stake in group firms; company points to restructuring & earnings push

A weak outlook for steel prices amid dull demand is expected to put pressure on Tata Steel at a time it is saddled with a consolidated net debt of Rs 69,000 crore, as on March 31.“Deleveraging is certainly going to remain slow for the company. Earnings are under pressure due to lower prices and there is low visibility on a rebound,” said Abhisar Jain, senior analyst with Centrum Broking.

The Tata Group's flagship company reported disappointing results for the March quarter, with losses due to a sharp fall in revenue and a non-cash impairment of Rs 4,951 crore it took on its long products division in Europe. Even without the latter, the performance was dismal, with consolidated revenue down 21 per cent over a year.

With total annual capacity of 28.4 million tonnes and despite operations over India, Europe and Southeast Asia, the company is unable to see a clearly bullish trend in any of these markets. “PMIs (Purchasing Managers Index) of key steel sectors continue to indicate lower levels of growth. Due to this, demand growth for steel is also seen as slower. Given all this, FY16 looks tough for Europe,” said Karl Kohler, managing director and chief executive officer of Tata Steel Europe at a post-earnings conference.

In India, PMI in the quarter gone by dropped to 52 from 54.5 in the December quarter. TV Narendran, managing director for India and Southeast Asia operations, said demand for steel from the automobile sector is looking mixed and a normal monsoon would be critical for demand to pick up from the rural segment.

For Southeast Asian operations, however, Narendran sees steadiness in this market, even as it remains impacted by Chinese imports, as in this country.

Tata Steel Europe contributes a little over 60 per cent to the parent's consolidated revenue. The SE Asian operations' pool is a little over a tenth of this.

“The company recently refinanced its debt. So, I think it will remain comfortable for a few years and go for another refinancing round. This perhaps could be the route taken to cut debt,” said an analyst with a foreign brokerage. Some brokerages were positive on the debt-reduction strategy. "Our net debt estimate for FY17 is 11 per cent lower at Rs 74,300 crore from the previous estimate of Rs 83,700 crore, due to better cash flow management in FY15 (primarily at other than India businesses) on account of working capital release and a cut in capital expenditure to Rs 10,000 crore each in FY16 and FY17 from Rs 12,500 earlier," Motilal Oswal said.

"Our strategy for Europe would be to focus on strip products, exit long products, reduce costs and restructuring of the pension plan to a defined contribution one,” said Kohler.

Though selling of non-core assets could be an option as in the past, most analysts felt sale of assets in a not-so-bullish market is difficult. “There is no complete list of the non-core assets but in a business climate so dull, it will be difficult to sell these. However, it can surely look at this option,” said an analyst with a local brokerage.

Last year, Tata Steel sold its Borivali unit's land for Rs 1,100 crore.

“Reducing shareholding in some of its group companies could also be an option,” said the analyst with foreign brokerage.

The company's three-million tonne Kalinganagar plant (in Odisha's Jajpur district). expected to commission in the second half of this financial year, could be seen as a positive, said analysts. Its expansion and its strong market positioning can drive Tata Steel India sales volume to 11.2 mt by FY17 from 8.7 mt in FY15, said Motilal Oswal.

While brokerages are suggesting options outside the business to lower the company's debt, the management seems to keep full faith in its earnings. “Once Kalinganagar production begins, we plan to cater to the oil & gas sector, which we havent so far. This will open a new market for us,” said Narendran.

“We reiterate our 'sell' rating on (the) Tata Steel (stock), with a target price of Rs 240,” said Centrum Broking.