Tata Steel Seeks Coal Assets to Improve Returns: Corporate India

Tata Steel Ltd., owner of Europe’s third-most indebted maker of the alloy, is cutting jobs and eyeing coking coal assets to boost profitability that’s yet to recover following the $12.9 billion purchase of Corus Group Plc.

India’s biggest steelmaker is targeting to increase its return on invested capital to more than 16 percent over the next five years from an annualized 12.5 percent in the three months ended March 31, Group Chief Financial Officer Koushik Chatterjee said in an interview. The gauge, which measures the efficiency with which a company uses its debt and equity, was at 32.6 percent in the year ended March 2007 before Corus was purchased, according to the company’s annual report.

Chairman Cyrus Mistry is seeking to cut costs by securing fuel and iron ore supplies in Europe with company-controlled mines to help guard against swings in commodity prices. Tata Steel, which is weathering a demand slump in Europe after buying Corus in 2007, sold businesses, wrote down $1.6 billion of assets and goodwill leading to a record loss last quarter and is focusing on high-value products for returns.

“The asset writedown may have pushed up the return on invested capital last fiscal year, but going forward it will need to sell non-core business and cut costs to have any chance of seeing an increase,” said Goutam Chakraborty, an analyst at Emkay Global Financial Services Ltd., who has a hold rating on the shares. “For the next couple of years, Tata Steel will be investing large sums in India, which will make it difficult to lift returns.”

Tata Steel shares gained 0.8 percent to 298.75 rupees at the close in Mumbai. The stock has declined 30 percent this year, compared with a 0.6 percent gain in the benchmark S&P BSE Sensex.

Yorkshire, Teesside

The company said in November it plans to reorganize its U.K. business, cutting 900 jobs in locations including Yorkshire, the West Midlands and Teesside. It will also close 12 factories, including Tafarnaubach and Cross Keys plants in South Wales.

Tata Steel’s net loss, including that of its European unit, was 65.3 billion rupees ($1.2 billion) in the quarter ended March 31, compared with a profit of 4.33 billion rupees a year earlier. Interest expenses on debt outstanding at the company, part of India’s largest business group, rose 4 percent in the last financial year to 39.7 billion rupees, data compiled by Bloomberg show.

Asset Sale

Tata Steel sold units worth 100 million pounds ($152 million) in Europe last year and is investing in an iron ore project in Canada from which shipments will probably start in the quarter beginning January. The company, which buys almost all of its raw material needs in Europe, is searching mostly for coking coal assets in different parts of the world, including Australia, Managing Director Hemant Madhusudan Nerurkar said in an interview.

“For strategic reasons we’d like to secure metallurgical coal mines, he said. “These don’t come easily. I can’t buy assets at ridiculously high prices.”

The company has a 35 percent stake in Rio Tinto Plc’s Benga coking coal project in Mozambique that gives it a right to procure 40 percent of the mine’s output. Shipments from Benga started in June 2012 and about 300,000 tons of coking coal has been dispatched in the last year, Chatterjee told analysts after earnings on May 23.

There have been delays in ramping up rail and port infrastructure, which affected the first phase of the Benga project, he said that day. About 1 million tons of coking coal is expected from the mine in 2013, he said.

Bond Risk

Tata Steel’s bond risk is rising from a 20-month low after the loss last quarter, eroding its ability to repay $5 billion in debt due by the end of 2015. The company, which had liabilities minus cash of $9.7 billion as of March 31, is borrowing more as it expands capacity in India.

The company plans to spend $2.5 billion this financial year on projects including a new plant in the eastern state of Odisha, Chatterjee said. The factory will take the company’s Indian capacity to 16 million tons by 2016, at par with its current European capacity.

Tata Steel incurs lower costs in India, compared with its European operations mainly because it sources all of its iron ore and about half of its coking coal requirements from its own mines. In its Indian operations, the company withstood declining prices in the last quarter to boost revenue by lifting output 26 percent and shipments 29 percent from a year earlier.

Rising volumes at higher per-ton earnings in India “de-risks structurally” the Tata Steel group from the challenges in Europe, Chatterjee told analysts last month.

“The volatility is higher in our European business due to weak macro conditions,” he said in the interview. “Our measures especially in Europe as well as the ramping up of the Indian operations and getting more volume in India in due course will help increasing ROIC.”