It's been just short of five years since Tata Steel acquired Corus (now Tata Steel Europe) for over $12 billion. The deal increased the company's steel producing capacity by five-fold. We take a quick look at how the deal has panned out over those four years.

BAD ECONOMY

Tata Steel's European operations have had a torrid time since the acquisition. The UK has seen steel production fall every year since 2007 with production during the seven months ended July 2011 flat-lining compared with the same period a year ago.

The more competitive operations in the Netherlands have fared better, with output staging a recovery in 2010 itself, with production this year up another 10 per cent. Steel consumption in the two geographies is still well short of the highs of 2007.

THE FINANCIALS

Volatile demand from user industries such as automobiles, consumer durables and capital goods in the region resulting from the setbacks of the credit crisis, has also resulted in shaky realisations on steel over the last three years. This has reflected on the company's financial performance.

Despite producing less than half of the steel volumes that European operations produce, Tata Steel's Indian operations have accounted for a lion's share (60 to 96 per cent) of the company's total profits (excluding extraordinary items) between FY08 and FY11. In FY10, the Rs 5,000-crore reported net profits turned in by the Indian business went a long way in stemming the red-ink resulting from the European operations (consolidated losses of over Rs 2,000 crore).

Net sales between FY08 and FY11 fell from Rs 131,000 crore to Rs 118,000 crore. Adjusted net profits (excluding extraordinary items) slipped from Rs 7,359 crore to Rs 6,560 crore over the same period.

INTEGRATION ATTEMPTS

Well outside of structural inefficiencies (resulting from logistical factors) at the UK operations, the root problem for the European operations lies in its inability to pass on high-raw material costs to the end-consumer given the weak demand scenario.

In an attempt to insulate the European arm from volatile input costs, Tata Steel has in the past five years invested in iron ore and coking coal mines in Canada, Africa and Australia. These moves are expected to begin boosting margins of the European operations over the next two years.

The European shake-up coupled with contractual buyers walking away from a deal had also pushed Tata Steel to act quickly and sell its unprofitable three-million-tonne-a-year Teesside Casting operations for a bargain price of about $700 million.

A range of other assets has also been sold off including Corus' aluminium and chemical businesses. Incidentally, one of Tata Steel's backward integration moves to secure iron ore also resulted in a windfall gain.

Australian miner Riversdale yielded an unexpected gain when the company was taken over by Rio Tinto earlier this year, Tata Steel doubled its investment in this company when it cashed out of the parent company.

Tata Steel's current cash reserves of around Rs 20,000 crore (compared with Rs 8,400 crore in 2009) are now crucial to funding its domestic expansion plans. Domestic capacity additions are a key step to better insulating Tata Steel from volatile global raw material costs.

REBALANCING ACT

While the benefits accruing from captive sourcing for Corus will result in better margins, Europe is likely to remain a challenging market for volume expansion given it is a capacity-heavy region. It will therefore be up to the Indian operations once again to drive growth for the company over the next five years.

Towards this end, the company will need to increase its presence back home while chipping away at costs in Europe. The company is in the process of increasing domestic brownfield steel capacity from 6.8 million tonnes to 10 million tonnes by this November (and ultimately to 13 million tonnes with the addition of Orissa).

The India operation's gross debt has moved from Rs 18,000 crore in FY08 to Rs 28,000 crore at the end of FY11, mainly on account of borrowings to fund this project. However, padded by cash from its rights offer earlier this year, issue of hybrid instruments and the sale of various assets, the company has seen consolidated net debt:equity moderate from 1.44 in FY08 to 1.2 during the most recent quarter ended June 2011.

Despite the company's turbulent journey, investors in the Tata Steel stock have fared as well as the Sensex in the last four years. The stock's 21 per cent absolute gain since February 2007 matches that of the broader market.

While those who bought into the stock at its peak of Rs 950 in 2008 may not have much to write home about, it has been a three-bagger for lucky investors who added it to their portfolio at Rs150 or thereabouts in end-2008.

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