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Mumbai: Tata Sons, the holding company of salt-to-software Tata Group, has refused to commit any further funds to support Tata Steel’s loss-making UK and Europe subsidiaries. As a result, a bailout by the UK government seems to be the only chance of survival for these businesses, officials close to the development said. However, the UK government is unlikely to offer more than one fifth of the funds required by these businesses, a person with direct knowledge of the development said.
With the UK government keen to support locally-owned businesses first, fund infusion from Tata Sons was expected to be a fallback option for Tata steel’s European businesses. But support from the Indian parent now seems unlikely.
The UK arm of Tata Steel has reportedly sought an estimated £500 million ( ₹4,750 crore) from the British government to survive the coronavirus lockdown period, according to UK media reports.
Tata Sons has to assign funds to meet several other financial commitments and Tata Steel will essentially have to fend for itself, officials said.
Focus on Preserving Cash: Tata Steel
Traditionally the holding company has always been seen as a financial backstop for its operating companies.
But Tata Sons chairman N Chandrasekaran had warned early this year that the Indian entity cannot keep funding losses.
Tata Sons plans to keep a war chest ready of over $5 billion (₹38,000 crore), as per the sources cited. The immediate priority is to keep ready funds of around $1.5 billion (₹11,400 crore) for urgent infusions into some businesses such as the airlines companies (Vistara and AirAsia) and Tata Motor’s loss-making Jaguar Land Rover (JLR ) unit.
Tata Sons did not comment for this story.
“European steel demand has sharply reduced compared to normal conditions and many of our customers paused production, including European car manufacturers. We therefore reduced production at some of our European mills to match this lower demand. Our European business is focused on preserving cash and liquidity to tide it over during the challenging period,” a Tata Steel stpokesperson told ET.
Though Tata Steel’s India operations are the most profitable in the industry, Tata Steel Europe has burnt free cash flow of nearly ₹26,000 crore between FY14 and FY19. However, some of that is masked by the debt arrangement between the parent company and Tata Steel Europe.
Post the Corus acquisition in 2007, Tata Steel had set up an off-balance sheet arrangement in order to effectively shield Tata Steel shareholders from the high debt levels incurred by the European assets. However, in the face of mounting losses and continued cash burn at Tata Steel Europe (TSE), Tata Steel management has, in order to stem some of the cash losses, replaced over time most of the external debt on TSE’s books with inter-group debt.
Anil Singhvi, chairman of corporate advisory firm Ican Investment Advisors, says Tata sons will do well not to put good money after bad. “Most of their overseas venture and tieups have been money-guzzlers, be it Docomo or Corus,” he said.
Since the acquisition in 2007, the UK business has not been able to generate profits. Analysts say at least ₹30,000 crore capital has been deployed in the Europe and UK operations since 2007. This has raised concerns of a major impairment or write-down in Tata Steel’s book and criticism over why should such bleeding businesses be supported by Tata Sons.
Tata Steel saw a significant increase in its overall debt in FY19, primarily because of the Bhushan Steel and Usha Martin acquisitions. But it has reduced its consolidated gross debt to ₹1,09,900 crore in the December 2019 quarter from ₹1,11,600 crore in September 2019.
Net debt stood at ₹1,04,600 crore at the end of December 2019. In January, the company repaid $500 million (about ₹3,500 crore) of debt and refinanced 1.75 billion (₹14,000 crore) of loan at better terms and better prices.
“Most of the subordinated inter-company debt, roughly £4.3 billion (₹40,700 crore) of the £5.3 billion (₹50,200 crore) inter-group debt at the end of FY19 on TSE’s balance sheet, is effectively equity – while Tata Steel Europe accrues interest on sub-ordinated debt of £4.3 billion, TSE doesn’t pay cash interest on these loans,” said Satyadeep Jain, analyst, Ambit Capital.
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