Tata Steel’s European reboot fails to cheer investors
The company plans to reduce headcount in Europe by 3,000, about a seventh of the company’s total headcount.
Of the four areas the programme will focus on to improve profitability, reduction in headcount can have the maximum impact. The company plans to reduce headcount in Europe by 3,000, about a seventh of the company’s total headcount.
But according to analysts, shedding jobs may not be easy and could hit a regulatory roadblock. “In view of the regulatory environment in Europe (particularly in the UK), we believe that manpower (reduction) looks challenging,” said Amit Dixit, metals analyst with Edelweiss Securities.
Other focus areas include increasing the share of value added products, optimization of production processes and reduction in procurement costs. Through its proposed transformation programme, TSE is initially targeting positive cash flow by the end of FY21. It is also aiming for an EBITDA margin of around 10 per cent throughout the market cycle, which appears unsustainable. Based on full year 2019 revenue figures, this would equate to £750 million (about Rs 7,000 crore) in EBITDA, the company said.
In view of the current market situation in Europe, this could be a challenging task. In the first half of FY20, Tata Steel Europe (TSE) has done an EBIDTA margin of 1 per cent and EBIDTA of Rs 227 crore, or £25 million.
In FY19, which has been the best year for the global steel industry in the past 10 years, Tata Steel Europe did adjusted EBIDTA of £589 million, including one-time income from carbon emission right sales that contributed £211 million.
ArcelorMittal, TSE’s European rival, gave a negative commentary on the European steel industry after its recent quarterly results. It marginally tweaked down CY19 global steel consumption growth forecast to 0.5–1 per cent year-on-year. It expects European demand to contract by 3 per cent as compared to 1-2 per cent earlier owing to auto slowdown and slowing construction.
Tata Steel’s stock is down 30 per cent over the past one year after a correction in steel prices due to weak demand. While its consolidated debt has risen to Rs 1.07 lakh crore, its EBIDTA fell sharply to Rs 9,550 crore in the first half of FY20. At the current price of Rs 401.75, the stock is now trading at EV/ EBIDTA of 7.7 times, higher than the historical average.