How Tata Steel is reversing its sunk cost fallacy

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26 Aug, 2025 12:21

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The world’s most astute investor and businessman Warren Buffett once admitted to losing a huge sum of money letting sunk cost fallacy (infusing more and more capital to salvage an original investment) play out by keeping alive the loss-making textile business of Berkshire Hathaway. He eventually rectified the mistake and gradually moved capital to more profitable and viable businesses.

The lost opportunity
A similar story is brewing at Tata Steel which is significantly curtailing its European exposure after Corus acquisition in 2007 led to a lot of cash burn and loss of opportunity cost.

JSW Steel, which last year generated a revenue of about Rs 70,000 crore, commands a market capitalisation of close to Rs 74,000 crore. Contrary to this, Tata Steel, with annual sales of Rs 1,31,000 crore, has a mcap of less than Rs 60,000 crore.

The restructuring
The company recently signed a 50:50 JV with Thyssenkrupp to combine its troubled European business with the later along with a transfer of debt. This is an important evolution in Tata Steel’s history as it will result in the hiving of its European business and deleverage the balance sheet, which has been the biggest drag on growth and market performance.

Tata Steel has a consolidated debt of about Rs 94,000 crore. Of this, the European business accounts for about $8 billion. Under the deal, a debt of Rs 20,000 crore would be transferred to the JV. This would lead to substantial reduction in the group’s financial leverage.

Focus returns to domestic operations
It would be a huge rectification of its capital misallocation. During FY18, non-India sales turnover was Rs 73,000 crore, contributing a meagre profit before tax and exceptional items of Rs 1,500 crore. In contrast, Indian operations had less sales (Rs 60,519 crore in FY18) but profit before tax and exceptional items of Rs 10,000 crore. Not just Europe, its southeast Asian operations posted an earnings before interest, depreciation, tax and amortisation (EBIDTA) per tonne of Rs 1,740 in FY18, which hardly justifies investment and management focus when one compares it with the average India EBIDTA/t of Rs 13,003.

Better late than neverThe management seems to be realising the huge opportunity it is missing in India. As per media reports, it is looking to exit its southeast Asian businesses spread in markets like Singapore, Thailand and Vietnam at valuations of about Rs 3,500 crore. Its southeast Asian operation delivered around Rs 10,000 crore in sales, with a mere Rs 437 crore in EBIDTA. This geography contributes close to 8 percent to group sales and less than 2 percent of group EBIDTA.

It could be a positive move as it will help reduce group leverage. In FY18, group debt-to-equity stood at 1.5 times and net debt-to-EBITDA stood at 3.3 times. While this is comfortable, it can turn risky in light of the Rs 35,000 crore acquisition of Bhushan Steel and about Rs 23,500 crore capex for Kalinganagar expansion (5 million tonne).

As against the current annual production of about 12 million tonne, it aspires to touch 24 million tonne by FY22. This would require additional capital and would lead to higher leverage, thus making it even more imperative to divest or completely exit these assets. These moves (Europe and South East Asia) could unlock additional capital, which can be ploughed back into its profitable businesses.

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