It isn’t often that one sees the fortunes –– and the reputational record –– of a 100-plus-year-old company turn on a dime. That prospect seems less likely when the company hails from one of India’s most respected corporate groups, given to conservatism in the conduct of its businesses.

But by any yardstick, Tata Steel’s acquisition of Anglo-Dutch steelmaker Corus in 2007 for a jaw-dropping $12.9 billion marks a defining moment in the history of the 108-year-old company, one that has called into question the perceived business infallibility of the Tatas.

Many of Tata Steel’s problems today –– principally, dented profitability and a debt pile-up of ₹85,160 crore –– can be traced to that deal. Everything about it, from the price to the timing to the debt-heavy funding mechanism to the post-merger management strategy, is acknowledged as egregiously flawed. Its effect can be felt in the distress sale of its UK assets just to check the bleeding of the company’s balance sheets.

For sure, the sheer size of Tata Steel’s balance sheet, and its ability to refinance high-cost debt, have diminished the downside effect. And, of course, other factors –– the 2008 global financial crisis, the implosion in the Eurozone economy, a slowdown in steel demand in developing countries, and China’s resort to dumping steel –– too contributed to the downturn in Tata Steel’s fortunes. But the scars from recent years will take a while to heal.

The Brexit shadow

For starters, the company’s roadmap for an exit from high debt, for which the sale of its UK assets is central, has been clouded over by global uncertainties triggered by the prospect of a British exit from the European Union, on which the UK votes next week.

The seven candidates that have been short-listed to take over the loss-making UK units, including the Port Talbot plant, which is said to be losing £1 million (₹9.7 crore) a day, are frustrated by the slow progress in the sale process.

The outcome of the June 23 referendum will negatively impact business sentiments: a British exit (Brexit) could see property prices crashing, which could drag the banking sector down with it. All this could potentially impact the valuation of Tata Steel’s assets.

The investigation against Tata Steel by the Serious Fraud Office in the UK for inappropriate testing and certification procedures at its South Yorkshire-based Specialty Steels has added another twist.

Deven Choksey, Managing Director, KR Choksey Shares & Securities, notes that while Tata Steel has not set a deadline to sell its UK assets, the Brexit debate complicates matters. The valuation and investors’ interest will also hinge on the extent of the British government’s support for the sale process, he adds.

‘Protected’ at home

At home in India, though, Tata Steel is on a slightly stronger wicket, with the addition of fresh annual capacity of three million tonnes. Although global steel prices have remained soft, the imposition of a minimum import price (MIP) and the safeguard duty in force until March 2018 to protect the industry from cheap imports have ringfenced the industry from global headwinds.

In fact, consequent on the implementation of the MIP in February, domestic prices of hot-rolled coils have increased by about 25 per cent from their lows early this year. Of course, the government has come in for criticism for protecting large steel companies at a time when small and medium enterprises’ exports are falling. Jayanta Roy, Senior Vice-President and Co-Head, Corporate Sector Ratings, ICRA, noted in a recent report that international prices may decline yet again, given the adverse steel demand-supply equation in global market. The long-term price trend in India would be determined by the final outcome of the anti-dumping investigations initiated by the Directorate General of Anti-Dumping & Allied Duties, he said.

G Chokkalingam, Managing Director, Equinomics Research and Advisory, said that while Tata Steel may have succeeded in selling its long product division in the UK, it would not be easy for the company to sell the bigger chunk of the strip product and speciality product divisions, given the Brexit-induced uncertainty.

Tata Steel was also impacted by the ban on mining at the Noamundi iron ore mine in Jharkhand in late 2014, which compelled the company to import iron ore for the first time in over 100 years. The ban was lifted in January. The mine, with an annual capacity of 10 million tonnes, was crucial to raw material supply for its Jamshedpur facility.

Steel demand in India is looking up, driven by governmental investments in infrastructure projects. However, the competition among steel companies is hotting up: most of the companies, which were operating at 80 per cent, are ramping up to improve their utilisation.

The challenge of change

The period since the early 1990s has been one of tremendous change for Tata Steel, the country’s first integrated steel plant, established in 1907 by Jamsetji Tata. In response to competition, it has had to go in for modernising, restructuring and wholesale diminution in its workforce. The company that once employed 80,000 people to produce 3 million tonnes of steel today employs only 20,000 people to produce 13 million tonnes. And the overseas acquisition overreach of the mid 2000s has imposed another kind of burden.

Over the past two years, the company has raised ₹7,480 from asset sales. It has made a provision of Rs 3,975 crore last fiscal, including Rs 1,397 crore for Tata Steel Minerals Canada. Early this year, it reduced iron ore mining operations at its plant in Canada due to “challenging conditions” in the steel and ore markets.

The investment of ₹11,480 crore made in the much-delayed Kalinganagar project too added to the debt burden. The company signed a memorandum of understanding with the Odisha government to set up a 6 million tonne steel plant at Kalinganagar in 2004 at an estimated cost of ₹15,400 crore. But the work started only in 2010 due to resistance from the people who refused to part with their land. The delay escalated the cost to ₹25,000 crore for the first phase of 3 million tonnes alone.

After the hiccups, the plant is ramping up to produce value-added products that fetch a better premium. The fall in raw material prices and rising steel prices bodes well for the company.

Iron ore production in India is expected grow 13 per cent this fiscal to 175 million tonnes, largely supported by supply from Odisha.

“Given the substantial iron ore inventory levels at mine-heads and with iron ore supply slated to increase further in the current year, domestic ore prices are unlikely to recover in the near term, thereby benefiting steel mills,” said Roy.

Despite the positive business environment, with steel demand and prices going up and raw material prices coming down, the extent of improvement in Tata Steel’s interest cover (the ability to pay interest) is unlikely to improve as the overall debt levels of domestic steel companies are unlikely to reduce dramatically. Consequently, the financial health of domestic steel players is likely to remain a concern in the near term, he said. And Tata Steel cannot remain immune to it.