Analysts expect next quarter to be better for Tata Steel

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29 Nov 2009

Tata Steel acquired Corus for $12 billion, making it the biggest outbound acquisition by an Indian company. It moved Tata Steel up the pecking order in an industry where having large capacities remains critical. With plants across the UK, Netherlands, Germany, France and Belgium, the buyout, in one stroke, gave Tata Steel a handy presence in the global marketplace. The going since then, however, has been a little tough for the Indian company with the global slowdown, in no small measure, playing a role.
Corus, which accounts for over 60% of Tata Steel’s output, cut production last year. This was when a global financial crisis tightened liquidity and eroded demand. Eventually, industries like automobiles and construction were in a spot.
For Tata Steel, there were immediate issues like repayment of loans, finances having to be restructured and integration of businesses. In the midst of all this, the commodity business was going through a low, which was to witness a drop in the demand for steel. Like any other company in the sector, Tata Steel too was affected.
As a result, the company recorded a consolidated loss for the quarter ended September 2009 of Rs 2,710 crore, against a net profit of Rs 4,770 crore last year.
Revenue during the said period fell 43% to Rs 25,270 crore. The silver lining has been that the restructuring and integration efforts appear to be paying off.
In April this year, the World Steel Association (WSA) predicted a 15% fall in global steel demand. In October, it revised its projections and said demand would fall only by 8.6%, implying better days ahead for the steel industry. “There has been a one-time restructuring cost of Rs 911 crore this quarter, which led to the loss. With steel prices recovering from the bottom, the next quarter should be much better”, says Pawan Burde, an analyst at Angel Broking.
Last month, the WSA said steel demand would fall 8.6% this year, though this is much lower than the 15% it predicted in April. As part of a restructuring, Tata Steel, earlier this month, completed an exchange offer of new foreign currency convertible bonds (FCCBs) for any or all of the existing $875 million convertible alternative reference securities (CARS) that is due in 2012.
Said Tata Steel’s group CFO, Koushik Chatterjee, “This not only reduces the overall finance charges for the company, but also extends the maturity of the bonds by two years. In addition, the lower conversion premium makes the exchange bonds more equity-like, which is in line with the company’s overall de-leveraging strategy.” He added that the successful execution of this issue re-affirms the credit standing of Tata Steel in global financial markets as the majority of the CARS which enjoyed credit protection have been exchanged for these new convertible bonds.
That apart, there is something to look forward to as well. Said Tata Steel’s MD Hemant Nerurkar, “Increased capacity in India enabled the group to take advantage of continuing demand growth. Our plans are on course to raise capacity at Jamshedpur by almost 50% in the next two years.” He added that the company was in a better position, than any other global steelmaker, to benefit from Indian steel demand, which from next year is expected to start growing faster than in any other major emerging economy. There could be something to look forward to at Tata Steel.

Source: Economic Times India