Tata Steel's UK unit may see improvement in profitability

MUMBAI: Tata Steel UK Holdings ( TSUKH), the wholly owned subsidiary of Tata Steel, may see improvement in its profitability in the current financial year after opening a new heat treatment plant at its Hayange plant in France, a Moody's Investors Service note said.

TSUKH, which recently more than doubled its output of hot- treated rail to 125,000 tonnes from 55,000 tonnes through opening of this new plant, is also likely to witness better operating margins, the note said.

"The new plant will more than double TSUKH's annual output of heat-treated rail to 125,000 tonnes from 55,000 tonnes which will secure the company's position in the resilient rail infrastructure market. Increased deliveries of high-grade steel will strengthen TSUKH's profitability, a credit positive for TSUKH and Tata Steel," the note said.

"In the fiscal year ending March 2014, we expect TSUKH, which generates around 55 per cent of Tata Steel's revenue, to show better operating margins," it added.

Interestingly, the development comes when Network Rail that owns and operates UK rail infrastructure, chose to source 95 per cent of its rail from Tata Steel until 2019 with an option to extend until 2024.

As per the note, TSUKH's EBIDTA margin was 4 per cent compared to 31 per cent for Tata Steel India in June quarter. For the last fiscal, while Tata Steel India had an EBIDTA margin of 31 per cent, TSUKH's margin was at one per cent.

The note pointed out that while a turnaround in TSUKH would benefit profitability of Tata Steel, the steel firm's free cash flow would remain negative in the coming quarters.

"Whereas a turnaround in TSUKH would benefit Tata Steel's profitability, we expect Tata Steel's free cash flow to remain negative in the coming quarters owing to ongoing capex in India and a build-up of working capital brought on by higher production in Europe," it said adding this will limit Tata Steel's ability to reduce its growing adjusted debt.