Why Tata Steel's 26% revenue growth fell to 1% for 10+ yrs

Around the mid-2000s, Tata Steel stood tall as one of the most profitable Indian steel-producers. Its revenue saw a healthy 26 per cent annual growth from FY05 to FY07. But like many champions, it wanted more. In 2007, it made a bold move, one that would bring its sales growth to a paltry 1 per cent per annum over the next 12 years (FY08-FY20).

That move was the $12.1 billion acquisition of Corus Steel in the UK, half of which was funded by a massive debt load of Rs 26,580 crore. Its debt-to-equity ratio jumped from 1.61 times in March 2008 to 2.21 times by March 2009.

On paper, the acquisition looked glorious. Revenues, production capacity soared in the following year. But as the global financial crisis hit in 2008, demand for steel collapsed, especially in Europe. Meanwhile, cheap Chinese steel flooded global markets and energy costs in the UK kept climbing. The European steel dream turned into a millstone around Tata Steel’s neck.

Over the next decade, the company found itself saddled with high interest costs that ate into earnings and led to disappointing returns. The stock posted a 10-year return of merely 2.6 per cent, a shadow of its former promise.

And here’s the punchline: the very thing that enabled Tata Steel to rise—debt—was what nearly broke it. This shows how even the most admired companies can falter when debt is misjudged. And why, for investors, the debt-to-equity ratio isn’t just a metric but a potential warning sign.

It’s a measure of how much a company relies on borrowed money versus shareholder funds. A high ratio, generally above 1, indicates aggressive borrowing. In periods of boom, this can boost growth. But when the tide turns, it can sink even mighty ships.

Jet Airways was another victim of high leverage.

Jet Airways: From the skies to bankruptcy

It was once India’s most loved full-service airline. It offered premium service, expanded rapidly, and captured a loyal customer base. To grow fast, Jet kept leasing aircraft (which added operating leverage) and took on debt for acquisitions.

In 2007, it bought Air Sahara—a move that eroded its brand and worsened its finances. Between FY04 and FY09, Jet’s debt exploded fivefold. Its debt-to-equity ratio ballooned to 12.6 times by 2009. Competition from low-cost carriers squeezed margins. And Jet didn’t have the balance sheet to cope.

By FY19, Jet Airways posted a loss of Rs 5,535 crore and collapsed under its own weight. It shut operations and entered insolvency. Most equity investors were left with nothing but just a harsh reminder that debt, when mismanaged, can make a business look far more stable than it truly is.

Why investors must watch the debt-to-equity ratio

Both Tata Steel and Jet Airways offer textbook examples of what happens when leverage goes unchecked. Here’s what you should remember:

• Debt fuels growth, but also magnifies risk. It’s a double-edged sword.
• A high debt-to-equity ratio can signal aggressive expansion, but also poor judgement. Especially when taken at the top of a cycle, like Tata’s Corus deal.
• In cyclical industries like steel and aviation, high debt can be fatal during downturns.
• Management quality shows up in how prudently debt is used. Overleveraging often reflects hubris, not vision.

Final word

If you’re an investor, don’t get blinded by revenue surges or global ambitions. Look under the hood. Read the balance sheet. Pay close attention to the company’s leverage. It's a window into how risky a company’s financial structure really is.

Because when a company borrows heavily to chase growth, it might just be mortgaging its future.

Also read: IndusInd Bank: The high cost of cheap valuation