Tata Steel Falls After $1.6 Billion Charge Signal: Mumbai Mover

Tata Steel Ltd., India’s biggest producer, fell to its lowest in two weeks after saying it expects a $1.6 billion writedown in asset values because of a drop in demand in Europe.

Shares fell 0.6 percent to 303.90 rupees, the lowest since April 30, at the close in Mumbai today. The planned charge will be for assets in Europe, South Africa and Thailand, the company said in a statement yesterday.

Demand in Europe fell by almost 8 percent in the year ended March 31 and almost 30 percent since the start of the financial crisis in 2007, Mumbai-based Tata Steel said in the statement. Weak economic and market conditions in Europe are expected to continue, leading to a cut in expected cash flows and the valuation of the company’s European business, it said.

“We are counting on the company’s Indian business to deliver, while international outfits suffer,” said Prasad Baji, an analyst at Edelweiss Financial Services in Mumbai, who recommends investors buy the stock. “We don’t see European operations turning net positive any time soon and we have factored that scenario into our valuations.”

The company reported a group loss of 5.3 billion rupees ($97 million) for the nine months ended Dec. 31, owing to losses in its European business, Tata Steel said in a statement on Feb. 13. The Indian business reported a profit of 37.54 billion rupees in the period. The company will report full-year earnings on May 23.

The Indian business, unlike its overseas units, gets all its iron ore and about 40 percent of its coking coal needs from its own mines, helping to protect against volatility in the prices of the raw materials.

Net Debt

Tata Steel’s debt covenants will not be affected by the non-cash writedown, it said in the statement. Net debt was 579.8 billion rupees as of Dec. 31, the company said.

Activity in Europe’s key steel-consuming sectors is estimated to have declined 4 percent in the quarter ended March 31 led by declines in construction and automobiles, which together account for more than half of the continent’s steel consumption, Eurofer, a steel industry lobby group in Europe said in an April 29 report.

Prospects for the remainder of 2013 are “dull,” the lobby group said in the report, adding consumption of the alloy is expected to decline 3 percent in the year.

Amid slowing demand, an increase in imports from China is further taking away market share from European producers, Eurofer said. China, the world’s largest steel producer, faces surplus steel capacity and is looking to sell the product in other markets.

‘Normal Market’

Europe has the capacity to make about 210 million metric tons of steel a year, while demand in a “normal market” is 150 million to 160 million tons, Eurofer said in July last year.

Tata Steel is considering selling some of its U.K. assets as a weakening economy erodes demand leaving factories underutilized, two people with knowledge of the matter said last month. Selling the U.K. units, acquired as part of a $12 billion takeover of Corus Group Plc six years ago, would help cut debt, the people said.

Losses at Tata Steel KZN, the company’s South African ferrochrome unit, widened in the year ended March 2012 after electricity costs rose, while output and prices fell, the parent said in its annual report for the year ended March 2012. Tata Steel shut down the unit, it said in a Feb. 13 analyst presentation posted on its website.

The company’s mini blast furnace in Thailand is also affected by the high cost of raw materials, it said in the statement.

The international operations have a negative valuation of 290 rupees a share, Edelweiss’s Baji estimates.

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