Tata Steel is finally getting ready to exit the ailing European steel market, which it entered in 2007 in a big way with the acquisition of Anglo-Dutch steelmaker Corus.

The $13-billion acquisition, a large part of which was debt-funded, catapulted Tata Steel into one of the world’s largest steelmakers. But it soon became the company’s pain point following the global economic slowdown. And with the global steel market never fully recovering from excess capacity since then, the acquisition bled Tata Steel badly.

Steel companies worldwide including in Europe have been bearing the brunt of weak steel demand and a surge in cheap imports from China.

Industry giant ArcellorMittal too has not been spared. It posted a net loss (adjusted) of $0.3 billion for the 12 months ending December 2015, compared with a net profit of $0.4 billion in the year before.

The chunk of Tata Steel’s operations is in India and Europe; it also has some presence in South-East Asia. The European business includes its Port Talbot and Scunthorpe plants and other facilities across the UK and the Ijmuiden plant in the Netherlands.

The European business, which accounts for close to 60 per cent of Tata Steel’s consolidated revenue, is loss-making even at the operating profit level. The Indian business, on the other hand, contributes about a third of the revenue and almost all the profit at the consolidated level.

For the nine-month period ended December 2015, Tata Steel Europe posted revenue of ₹51,147 crore, down 15 per cent year-on-year. It reported an operating loss of ₹339 crore compared with an operating profit of ₹3,231 crore in the year-ago period. The Indian business reported operating profit of ₹8,707 crore.

Successive years of losses, along with goodwill and other asset write-offs at the European business, have eroded Tata Steel’s net worth over the years.

The sale of the European business, once it happens, will clean up the company’s books — while it will shave off a large part of the company’s consolidated revenue, it will leave behind the more profitable Indian business. Also, the proceeds from the sale will help it pare its debt. As on March 2015, Tata Steel had consolidated debt of ₹69,300 crore — about a third of it from the European business (external borrowings of ₹21,820 crore).

Cheering the move, the Tata Steel stock ended the day almost 7 per cent up.

Expanding in India

While Tata Steel has been exploring options to sell off its plants in Europe, it has been expanding its India operations. With good reason.

One, even as global steel demand has been falling, India has seen a pick-up in consumption. Two, Tata Steel’s India operations meet its entire iron ore requirement from captive mines.

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