The Party Ended But They Are Still Paying For It!

The party ended in 2008. But the Tatas, the Mittals, the Ruias and several other large Indian corporates  that went global, fuelled with debt, during the 2003-07 bull run, are still paying for it.

 

 

 

- Amit Bhandari

Debt leads to fragility’ is a key message that Nassim Nicholas Taleb, risk analyst and author, has harped on for a long time. This lesson is being driven home to an increasing number of Indian companies, which had binged on debt to fuel large acquisitions a decade ago. The first wave of Indian companies to have gone global during the 2003-07 bull market is still facing the long hangover of that party.

On 11 April 2016, Tata Steel announced the sale of its long products division in Europe for ‘a nominal consideration’ — reportedly £1. This came less than two weeks after the company announced that it was seeking to “explore all options for portfolio restructuring including the potential divestment of Tata Steel UK, in whole or in parts.” Tata Steel has already suffered a hit of £2 billion (approximately Rs 19,000 crore) in the past five years from its UK business. The proximate cause for the distress is the slowdown in China; as steel demand in China has reduced, Chinese steelmakers are dumping the metal across the world, hitting profitability of Tata’s UK operation.

Effectively, Tata Steel has sold off about one-third of its European capacity for just £1. The debt position of the company remains unchanged, says brokerage house Morgan Stanley in its note on the transaction. This means the company has literally given the asset away. Even so, the development is being seen as positive — brokerage house UBS termed it a “welcome conclusion of Tata Steel’s long-running attempts to dispose of these assets”. Morgan Stanley has an ‘overweight’ rating on the stock while UBS rates the company a ‘Buy’.