The separation of the British Steel Pension Scheme (BSPS) from Tata Steel UK will result in savings to the tune of £60-65 million annually, according to estimates by steel sector consultants. The savings, experts say, can potentially be invested in capex to make the business more sustainable. Prior to the separation of the BSPS from the UK business, the commitment to pensions was estimated to be way higher at around £100 million.
Critically, the separation of the pension scheme from Tata Steel UK clears the decks for a merger with Thyssenkrupp, which has now been in the works for close to two years.
The joint venture will help prevent the cash burn that has largely contributed to Tata Steel’s net debt over the years. Between 2010 and 2017, Tata Steel’s consolidated net debt increased to Rs 74,500 crore from Rs 44,400 crore largely due to an increase in the European debt to Rs 51,700 crore from Rs 29,300 crore.
Koushik Chatterjee, group executive director, Tata Steel, said following the closure of the defined benefit scheme, the company now offers a defined contribution scheme on on ongoing basis for the current employees.
“This will reduce the costs on the company and along with the various other measures under way will help in the sustainability of the business,” Chatterjee.
He added the new Scheme BSPS2 when formed will be substantially de-risked with a cash flow-matched asset-liability profile.
Shares of Tata Steel ended Tuesday at a six-and-a-half year high of Rs 683.15, up 3.3% on the BSE. The stock is up 75% so far in 2017 against the benchmark Sensex’s gain of 21%.
Analysts say the venture with the German industrial group will help Tata Steel transfer some part of the Europe debt to the JV.
Kotak Institutional Equities estimates that the combined entity can earn an operating profit or Ebitda of more than $1.5 billion on volumes of 20 million tonnes, and can have a market share of 10-12% in Europe. “Tata Steel’s leverage ratios can improve materially with net debt to Ebitda coming down to 3.8 times against a high of 9.2 times in 2016,” analysts wrote.
Tata Steel reported a strong performance in the three months to June, posting a consolidated net profit of Rs 921 crore against a net loss of Rs 3,183 crore in Q1FY17. Revenues grew nearly 20% year-on-year to Rs 30,973 crore. Tata Steel’s performance in Europe was creditable with revenues rising 28% year-on-year to £1,703 million, reflecting improved market conditions and increased sales of differentiated products.
Tata Steel UK said on Monday that it has received the approval from the Pensions Regulator for a regulated apportionment arrangement (RAA) in respect of the BSPS. As part of the RAA, a payment of £550 million from Tata Steel UK has been made to the BSPS and shares in Tata Steel UK, equivalent to a 33% economic equity stake in the company, have been issued to the BSPS trustee under the terms of a shareholders’ agreement.