Tata Steel in Trouble: What's the Fallout From Its Huge EU Writedown?

One of the world’s leading steel producers, Tata Steel, announced a US $1.6 billion asset write-down earlier this week on its European unit.

Effectively, it means that the company feels that some of its assets, primarily European, are not worth as much as they were. In 2006, Tata Steel had shelled out US$12 billion to acquire UK-based Corus Group plc. At the time, the company’s assets were valued at $9 billion and the additional $3 billion was termed goodwill premium.

The Indian media has labeled this as “the largest write-down ever for an Indian company.” So where next from here?

Tata Steel has said the write-down for the financial year that ended March 31, 2013, was due to weak economic and market conditions in Europe.

The steel company said it has decided to write down goodwill and assets worth $1.6 billion primarily due to the weaker macroeconomic environment that it has forecast would continue over the near and medium term. The steel producer did not give a breakdown of the write-down, saying it would do that when it announces its yearly results on May 23.

Tata Steel’s acquisition of European steelmaker Corus in 2007 had revealed the Indian company’s global ambitions. However, the same division is reportedly dragging Tata Steel down. Last year, the company cut 500 of 18,500 jobs in the UK. Europe now accounts for about two-thirds of sales and production for Tata Steel.

Tata Steel said demand had fallen 8 percent in 2012-13 and almost 30 percent since the emergence of the global financial crisis in 2007. In a statement, the company said the condition is expected to continue, and has led to the downward revision of cash flow expectations underlying the valuation of the European business. The company also insisted that its financial covenants would remain unaffected by the non-cash write-down of goodwill and assets.

However, though the short term looks challenging, analysts believe that cutting down on capacity in Europe is not really bad news. A section of the analysts here, though, feel that Tata Steel’s shrinking European operations should buttress profitability and return.

Sohrab Darabshaw contributes an Indian perspective to MetalMiner.

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