European operations account for 35 pc of Tata Steel's global shipments in H1 FY20
European operations account for 35 pc of Tata Steel's global shipments in H1 FY20

Tata Steel's cost rationalisation in European operations a credit positive: Moody's

ANI | Updated: Nov 25, 2019 12:13 IST

Singapore, Nov 25 (ANI): Tata Steel's planned cost rationalisation programme for its wholly-owned subsidiary Tata Steel UK Holdings (TSUKH) is credit positive for both companies because it will support a turnaround in the latter's less profitable operations that have dragged on Tata Steel's consolidated credit quality, Moody's Investors Service said on Monday.
The European operations accounted for 35 per cent of Tata Steel's total shipments in the first half of fiscal 2020 ending March 2020 but they generated only around 2.4 per cent of its reported consolidated earnings before interest, tax, depreciation and amortisation (EBITDA).
The programme features two key initiatives for European operations: reducing costs and improving realisations. Synergies from centralised sourcing of key raw materials and capital equipment for the European and Indian businesses and a reduction in workforce of up to 3,000 (or 15 per cent of its total employees in Europe) will reduce costs, said Moody's.
At the same time, an improving product mix with an increasing contribution of high-value steel products will support better realisations. The company also plans to deploy technology -- including the application of big data and advanced analytics -- to streamline and automate processes, reduce lead times for orders, improve production planning, and streamline its marketing and sales network.
"If these concerted efforts materialise into significant cost savings, it will help improve profitability."
In particular, the company targets improving the European operations' profitability measured by the EBITDA margin to 10 per cent through the cycle on a reported basis from 1 per cent in the first half of fiscal 2020. Additionally, the transformation plans for the European operations to generate positive free cash flow in fiscal 2021.
"Although the programme is credit positive and a continuation of the company's efforts to turnaround the European operations, a timely and meaningful improvement in performance is key. Sustained weakness in demand from Europe's steel-consuming sectors, global economic slowdown and increasing trade barriers cast downside risks to the pace of credit profile improvement," added Moody's.
Tata Steel's Indian operations are the cornerstone of the company's strong profitability because these operations are integrated into the production of key raw materials in steelmaking, which combats the country's slowing steel demand and declining end-product prices.
Sluggish economic growth with weak demand from automobile, manufacturing, property and construction industries have diminished steel demand in India and caused a decline in end-product prices in the first half. Even so, Tata Steel reported a 26 per cent EBITDA margin in the first half of fiscal 2020 for its standalone Indian operations.
"Given the large gap in the profitability of its European operations and that of its India business, we do not anticipate any significant change in their respective contribution to the company's consolidated EBITDA over the next two years at least," said Moody's.
However, a turnaround in the performance of the substantially less profitable European business will improve TSUKH's credit profile and reduce the divergence in the two business' credit strengths, it added.