Tata Steel reported losses for the latest quarter ended Dec\u201922. Coming soon after an exceptional FY22, this shows the vulnerability of its international business which overshadows the strong domestic financials. The company offers interesting management lessons not only because of its persistence but also because the setbacks have not deterred it from taking risks in the domestic market. Here is an attempt to look at the company, its strategy and financials.<\/p>\n
Tata Steel is among the top ten global producer of Steel with total installed capacity of 33 MnTPA (million ton per annum) at the end of FY22. Of this, about 20 Mn tons is domestic; at Jamshedpur 11 MnTPA, Dhenkanal (Orissa) 5.6 Mn tons and Kalinganagar 3 Mn tons. The Dhenkanal plant was acquired from Bhushan Steel under IBC (Insolvency & Bankruptcy Code) in 2018 and merged in FY22. The international facilities are located in Netherlands (7 MnTPA), UK (5MnTPA) and Thailand (1.7 MnTPA). The first two were part of Corus, acquired in 2005 and operated under Tata Steel Europe. The two were created as separate business units in FY22 to insulate Netherlands business from the UK which faces significant stress.<\/p>\n
Company has also completed the acquisition of Neelachal Ispat with a capacity of 1.1 Mn tons along with iron ore mines from a consortium of public sector enterprises during FY23. The plant was shut for last two years due to financial issues but restarted a few months after acquisition. Other than the steel manufacturing facilities, company also owns significant mining assets, for iron ore, coking coal, etc which provide huge cost advantage and reduces price volatility. While iron ore mines are sufficient to meet its entire domestic needs, coking coal mines provide about 20% of requirement. In terms of its output, company has transitioned from being a commodity producer to value added segment which now account for two-thirds of its production.<\/p>\n
While the Tata Steel, indeed, the entire Tata group was slow moving elephant till about 2000, the strategy changed around that time with greater focus on expansion especially in global market. In line with this strategy, it acquired small businesses in Singapore and Thailand in 2004 and 2005 and a bit-ticket acquisition of Corus, four times the size of its domestic business, in 2007. Corus was purchased for a consideration of over Rs 50.000 crore (as per the then prevailing exchange rate), more than the size of Tata Steel\u2019s balance sheet then! With rapid inorganic expansion in these years, its production rose sharply to over 25 Mn tons. In contrast, its production had risen from 2 Mn tons in 1990 to just 4 Mn tons in 2004.<\/p>\n
While the acquisition gave it volume and global visibility, the acquired assets continues to remain a drain on the resource of the company even now. TSE (Corus renamed as Tata Steel Europe) has made losses for most of its operating years. (As per the annual report, FY22 was its best year so far). Company has remained continuously engaged over last 15 years to restructure the business to reduce losses. The first plant from TSE portfolio sold was in 2011 at Teesside with capacity of 3 Mn tons and the second one at Scunthorpe with 5 Mn tons in 2016 for a nominal value of \u20ac1. (Incidentally, major part of Teesside plant was shut down in 2015). As a result, the European operation is now about half of what it acquired in 2007, out of which UK plant still remains under stress. Company also had to sell-off parts of its south east Asia plants over the years including a part in FY22 and retains only the Thailand unit now.<\/p>\n
The restructuring hasn\u2019t come without cost. The company had to write-off substantial amount towards its acquired assets. It wrote-off over Rs 8,300 crore in FY13, Rs 6,000 crore in FY15, Rs 9,700 crore in FY16 and Rs 3,000 crore in FY20. The company, thus, has written-off over half of the amount it paid to purchase Corus in 2007. Despite such a huge financial shock, company has managed to survive because of the strength of its domestic operations.<\/p>\n
However, FY22 was an unusual year for the company. Company recorded turnover of Rs 2.4 lakh crore on consolidated basis, 56% growth over previous year. Among the major cost items, raw material at about Rs 82,000 crore rose by only 26% whereas employee cost at Rs 23,000 crore rose only 16%. Finance cost was flat at about Rs 4,500 crore, down from a peak of Rs 7,500 crore in FY20. With sharp increase in sales and limited increase in cost, EBITDA more than doubled to Rs 63,800 crore whereas net profit rose to Rs 41,700, five times the previous year. International operations moved from loss of Rs 9,400 crore in EBITDA terms in FY21 to profit of Rs 8,100 crore.<\/p>\n
The strong financial performance helped significant repair of its balance sheet. Total balance sheet rose to Rs 2.8 lakh crore, 16% higher than previous year. Out of this, total equity rose to Rs 1.17 lakh crore from Rs 77,500 crore whereas gross debt came down from Rs 88,5000 crore to Rs 75,600 crore. Total borrowings had risen to almost Rs 1.2 lakh crore in FY20, partly a result of acquisition of Bhushan Steel. (Rest of the money is accounted by trade creditors, deferred taxes etc).<\/p>\n
On the asset side, it has property, plant and equipment (PPE) at Rs 1.2 lakh crore, capital work-in-progress at Rs 21,000 crore and as much as Rs 49,000 crore of inventory. Even in terms of finished goods, this translates to 2\u00bd months of sales which is quite high. (Assigning parts of it to raw material, work-in-progress and finished goods would increase it further). Goodwill on consolidation and other intangible assets stands at about Rs 9,000 crore, down from over Rs 20,000 crore at the end of FY12, a result of various write-offs. Cash & cash equivalents rose to Rs 15,600 crore from Rs 5,500 crore a year ago, company not able to manage ringing cash register!<\/p>\n
Even though international operations managed to make profits in FY22, there are two significant differences in cost structure. While raw material to sales ratio for domestic was about 28% for FY22, it stood at 42% for international. Similarly, employee cost to sales was 7.5% for domestic business, against 19% for international. As a result, EBITDA margin for international business was just about 7.5% against 25% for domestic business which makes them highly vulnerable to price fluctuations. This was evident from the results for the quarter ended Dec\u201922. With decline in steel prices, EBITDA per ton for Europe\u2019s business moved from Rs 13,600 per ton in the previous year to negative Rs 7,800 per ton. While it fell for domestic business also; from Rs 28,600 per ton to Rs 10,400 per ton, there was sufficient cushion to absorb the decline. Domestic business\u2019 profits during the quarter was not enough to absorb the loss of international business leading to loss of Rs 2,500 crore on consolidated basis.<\/p>\n
A comparison of standalone against consolidated financials shows another important divergence. The equity of standalone company is Rs 1.25 lakh crore, higher than Rs 1.17 lakh crore on consolidated basis. This means company\u2019s overseas operations has negative net worth. The negative net worth was as much as Rs 35,000 crore in FY15, came down to about Rs 20,000 crore in FY21 and recovered furthermore in FY22. Whether this will reduce further or widen again in FY23 still remains a question mark.<\/p>\n
(Note \u2013 All figures from company\u2019s annual report and analysts\u2019 presentation. Image Soruce – Company Website)<\/p>\n","protected":false},"excerpt":{"rendered":"
Tata Steel reported losses for the latest quarter ended Dec\u201922. Coming soon after an exceptional FY22, this shows the vulnerability of its international business which overshadows the strong domestic financials. The company offers interesting management lessons not only because of its persistence but also because the setbacks have not deterred it from taking risks in […]<\/p>\n","protected":false},"author":8,"featured_media":18776,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_monsterinsights_skip_tracking":false,"_monsterinsights_sitenote_active":false,"_monsterinsights_sitenote_note":"","_monsterinsights_sitenote_category":0,"footnotes":""},"categories":[856,919],"tags":[],"class_list":["post-18775","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-corporate","category-corporate-2","membership-content","access-restricted"],"yoast_head":"\n