Burned by Corus, Tata Steel Seeks Solace in India Prospects

  • Company may consider purchasing distressed local steel plants
  • Koushik Chatterjee says huge potential unfolding in India

Tata Steel Ltd., which is considering selling its U.K. unit amid a global glut and weak demand, is turning its focus back to India where it sees a long-term opportunity.

India’s second-largest maker of the alloy will look at buying distressed assets as rapid economic expansion fuels demand in the coming years, according to Executive Director Koushik Chatterjee. He announced the decision to steer out of the U.K. business on Wednesday, marking the unraveling of Tata Steel’s $12 billion acquisition of Corus Group Plc in 2007, India’s most expensive ever.

The company sees “huge potential demand waiting to unfold over decades in India,” Chatterjee told reporters on Wednesday. “There are opportunities over the long-term in India unlike European markets which have matured.”

Buying troubled local mills weighed down by soured debt would mark a change in strategy for the Mumbai-based alloy maker, which is saddled with almost $11 billion of debt. Cheaper exports from China and high manufacturing costs have eroded earnings, and the company’s current market value of about $4.5 billion is less than half the sum paid for Corus.

Expensive Mistake

“Corus was always an expensive acquisition and in hindsight it is an expensive mistake,” said Mehul Sukkawala, Singapore-based corporate ratings director for Standard & Poor’s. “Acquiring Corus was a change in strategy toward going international. This is about scaling back and focusing more on India, which is one of the few steel markets that’s still growing.”

Tata Steel is part of the $109 billion coffee-to-cars Indian conglomerate headed by Cyrus Mistry. Under his predecessor Ratan Tata, the group made many acquisitions including marquee brands such as Jaguar Land Rover and Tetley tea besides Corus.

Shares of Tata Steel declined 1.4 percent to 319.70 rupees in Mumbai on Thursday. They have advanced 23 percent this year compared with a 3 percent decline in the benchmark S&P BSE Sensex. The stock jumped 6.7 percent on Wednesday, the most in almost a month, after the company revealed its plan.  

‘Perfect Storm’

“The global steel sector is facing an existential crisis” hit by cheaper Chinese imports and weak demand in Europe in the aftermath of the 2008 financial crisis, said Chatterjee. “It is what we call the perfect storm.”

The company is more upbeat on India. It is setting up a 3 million-ton steel plant in Kalinganagar in the eastern state of Odisha. The government estimates steel demand will rise 10.3 percent a year before 2017. Per capita consumption of finished steel was 59 kilograms in 2014, or 27 percent of the global average, leaving a lot of room for growth as infrastructure projects are implemented.

India’s $2 trillion economy is likely to expand 7.6 percent in the year through March, the fastest pace among major emerging markets, according to government estimates.

While the U.K. operations affected the consolidated earnings of Tata Steel, the India business remains strong, S&P’s Sukkawala said. The share of revenue from its India facilities more than doubled in the last fiscal year from 15 percent in 2007-08, according to data compiled by Bloomberg.

For Tata Steel, struggling local businesses could be a hunting ground. With stressed assets at a 14-year high, Indian banks are looking at ways to recover their dues, including sales of assets belonging to defaulters as they come under mounting pressure to tidy up their balance sheets. Steelmakers owed banks 3 trillion rupees, according to the latest data from the Indian central bank.

Tata Steel and JSW Steel Ltd. are said to be interested in taking over Essar Steel India Ltd., according to people familiar with the matter, as banks try to recover dues. Chatterjee declined to comment on specific deals.

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