Tata Steel to take Rs 6,500-cr impairment charge

Analysts say write-down makes sense for Tata Steel as it plans to sell long-products division

Tata group flagship company Tata Steel on Thursday announced a Rs 6,500-crore goodwill impairment charge for the loss of value of operations in Europe, Canada, and Mozambique in 2014-15.

(A write-down is a reduction in the value of assets).

“The review was undertaken, taking into account the external economic environment and macroeconomic conditions in each of the geographies, underlying demand-supply imbalance facing the global steel sector, significant volatility in iron ore and coal prices in the last 12 months and the current view of the long-term forecast of steel and its raw material prices,” said Tata Steel in a BSE notification.

Of the total impairment charge taken for the year gone by, approximately Rs 5,000 crore taken in the final quarter of the financial year mainly relates to the long-products UK business in Tata Steel Europe, apart from the write-down of investments in raw material projects in Mozambique, Ivory Coast, and the Taconite project in Canada.

With this, the long products UK business in Tata Steel Europe will now be fully impaired, said the company.

“It makes sense to write down the long products division of Tata Steel Europe, as the company is in talks with Klesch Group to sell the unit. Tata Steel knows it cannot sell the unit at the price it had purchased. With the write-down, the value of the unit will be lower now and the company can show on books that there is no major loss incurred on investment after sale,” said an analyst with a local brokerage.

Details of the impairments will be included in the audited financial results on Wednesday, said Tata Steel.

In the first quarter of 2014-15, the steel producer had taken a non-cash impairment charge of Rs 1,577 crore towards its investment in the Mozambique coal project.

The write-down was perhaps expected, since the long-products division was not doing well and so analysts do not see shares reacting sharply.

“When the actual sale of the unit happens, shares may react positively as this unit does not contribute to Ebitda (earnings before interest, taxes, depreciation, and amortisation), and after the sale, the debt can be reduced from the funds received from its sale,” said the analyst.

In 2012-13 (April-March), Tata Steel had taken a non-cash write-down of nearly Rs 8,500 crore ($1.6 billion) on the back of weak economic environment in Europe. The impairment taken then also included a write-down of its ferrochrome business in South Africa and a mini-blast furnace in Thailand.

According to the company's 2011-12 annual report, Tata Steel's consolidated goodwill was Rs 17,354 crore ($3.2 billion) and a lion’s share of that was on account of the $13-billion Corus acquisition in FY07. In effect, therefore, Tata Steel had written off half its goodwill accrued.