Why is Tata Steel the most vulnerable in Tata fiasco

Analysts have given the change of guards at Tata Sons a miss by calling it an event that will not have much impact on the group’s long term valuations.

Financial services intermediary HDFC Securities, had in a report on Cyrus Mistry’s replacement, said that though the market liked Mistry and gave him a long rope of 30 years to prove his mettle had he continued to lead the steel-to-salt conglomerate, the current disruptions will not have any lasting impact on the valuations of the company.

This may be true for the group overall, especially in a well-managed group like Tata’s. However the group’s individual companies could be facing the brunt of Cyrus Mistry’s removal. Among the companies that are vulnerable to Mistry’s exit is Tata Steel, especially its European venture. Mistry was strongly in favour of selling the unit. He had already started selling the company in parts by selling the Scunthorpe Steelworks earlier in May.

Tata Steel and more specifically its European operation will be at the centre around which the battle will be fought.

British media has already welcomed Mistry’s departure. Guardian has this to say on the development: “The departure of Mistry as chairman could be good news for Tata Steel’s 11,000 UK workers because Ratan Tata is a renowned Anglophile who bought the business in the first place.”

Trade Union’s too have welcomed the move. Harish Patel, nation officer of Unite, the union, Britain’s largest trade union told Business Standard (Click here to read the story) “Ratan’s appointment is being looked at positively as he is known to be more employee-friendly and more committed. There is hope that perhaps there could be a change of heart for what’s being planned at Talbot at the moment.”

If the trade unions are happy, should the shareholders worry? Mistry has in his letter to the directors of Tata Sons pointed out that European steel business is facing potential impairments of $10 billion, which is around Rs 66,527 crore. The impairments mainly pertain to the acquisition of Corus for around $12 billion.

While the impairment figure itself is huge, the problem becomes worse when compared to Tata Steel’s value. The company has a market capitalisation of Rs 38,737 crore and has fixed assets worth around Rs 60,648 crore. Clearly, if the impairment is taken on the books it will be detrimental for the stock.

However, fundamental changes are helping Tata Steel. European Union has imposed anti-dumping duty on Chinese imports plus a weaker British Pound is also helping Tata Steel’s European operation.

What adds to the existing uncertainty post Ratan Tata’s re-instatement is the proposal to sell the division to Thyssenkrupp. Reports say that Tata Steel is in negotiations with the pension regulator to resolve the contentious pension issue.

Analysts and sector experts had appreciated Tata Steel’s stance of exiting from the European operations. J J Irani, former managing director of Tata Steel had said that he was happy that Tata Steel board had taken the decision to divest the UK business

However, these events will change if Ratan Tata and the board decide to hold on to the company. In any case it would reflect badly on him to sell a unit bought at $12 billion for a fraction of the price. Decision on Tata Steel’s Europe will be crucial in days ahead for Ratan Tata as well as the company’s shareholders.

-Shishir Asthana

This article was published in Business Standard. Click here


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