Cyrus Mistry should have tried to sell Corus earlier
Though this is the first time since 2010 that the Corus operations have turned in an ebitda loss, of Rs 340 crore in the first 9 months of FY16, the fact is the UK operations have been bleeding Tata Steel for a long time. In 2014 and 2015, a Kotak Institutional Equities report points out, while Europe showed an ebitda of $845 million, this masked a loss of $363 million for the UK operations —at a PAT level, of course, the losses were $2.3 billion and $1.9 billion respectively, not a small number by any reckoning. Add to this, the capex of over $500 million in these two years alone—that’s on top of the $12.1 billion paid in 2006 and another $2-3 billion of investment in the years after that—and you are talking some pretty serious cash-burn. Which is why, it is hardly surprising that Tata chairman Cyrus Mistry should want to put the UK assets on the block, except it is difficult to see the group being able to find a buyer for the plant at a time when the biggest buyer of steel—China—has not only seen a dramatic fall in demand, but also has huge overcapacity and is dumping steel in the rest of the world. The fact that the UK has not been able to hike import duties in the manner the US has is a big reason for the UK operations getting worse, but they have always been a drag. In 2013, as this newspaper had pointed out, based on the one-year forward for the domestic business and an EV/ebitda multiple of around 6-6.5 for businesses like steel—and a net debt of around Rs 10,000-15,000 crore—Tata Steel’s India operations should have had a standalone market capitalisation of Rs 75,000 crore versus the actual which was half that; even back then, the European operations were killing the company. We could do the same exercise today, but the results wouldn’t be robust since a lot of debt has been taken on for the Kalinganagar plant which will take a while to start contributing fully to the top- as well as bottom-line.
Indeed, Mistry needs to do a lot more culling. There are the obvious duds like Tata Teleservices which lost Rs 3,846 crore in FY15 and needs to pay anotherRs 7,250 crore to DoCoMo for its exit. The group, similarly, is heavily dependent upon TCS which, while accounting for a fifth of turnover, accounted for nearly 70% of PAT in Jan-Dec 2015. In FY15, the group’s return on equity was 17.4% but collapsed to 8.9% ex-TCS, and the group’s latest market capitalisation falls from Rs 7.6 lakh crore to Rs 2.7 lakh crore without the software giant. That is not a very happy state of affairs.