By Debarati Roy, Bloomberg
Mumbai: Tata Steel Ltd. is widely expected to post a record fourth-quarter profit on higher sales and prices, helping fund the acquisition of Corus Group, the biggest takeover by an Indian company.
Profit rose to Rs11.95 billion in the three months ended 31 March, from Rs7.83 billion a year earlier.
A rally in Asian steel prices has helped Chairman Ratan Tata sustain the fastest pace of profit growth in more than two years and convince investors of the merits of spending more than 10 times annual profit to buy Corus. The UK steelmaker raised prices twice since Tata agreed to pay $12 billion in January to lift the Indian producer 55 places in global rankings to sixth.
“Suddenly, Corus doesn’t seem as expensive as it first did,” said Sanjay Makhija, vice president at Fortune Financial Services in Mumbai. “The buoyancy in prices could not have come at a better time” for Tata Steel, he said.
The Tata-Corus combination, formed in the steel industry’s second-biggest takeover behind Mittal’s $38.3 billion purchase of Arcelor SA last year, will sell two-thirds of its production in Europe to customers including Ford Motor Co.
“Prices in Europe have grown by 15% in the last three months, compared with 13% for Asia and flat growth in the US,” Rakesh Arora, an analyst with Macquarie Securities Ltd. said in an 18 April note. “With the combined entity getting 80% of revenue from Europe, we consider Tata Steel a play on European steel prices.”
In India, where Tata sells most of its products, prices in the quarter ended March were 21% higher on average from a year ago as the world’s second-fastest pace of economic growth boosted steel demand. Hot-metal production reached a record 5.5 million tons in the year ended 31 March, Tata said on 2 April.
Output at state-run rival Steel Authority of India rose to 12.6 million tons in the period. The company may say on 21May fourth-quarter profit rose by 60% to Rs17.6 billion.
Tata will contribute $4.1 billion and banks will arrange $6.14 billion in debt and provide $2.66 billion as a bridge loan to fund the Corus purchase. Both Moody’s Investors Service and Standard & Poor’s have said they may lower Tata’s debt rating because of funding concerns.
Still, the company’s shares have climbed by 43% in the past three months, beating bigger rivals, on expectations that higher metal prices may help repay loans. Arcelor Mittal’s stock has gained by 13% in the period, while that of Nippon Steel Ltd., the world’s second-biggest producer, and Posco, the No.4, have each risen by 16%.
“Higher steel prices will help us make more profits and definitely help us tide over the loans,” T. Mukherjee, deputy managing director, said in an interview. Prices may remain strong for the next two years, he said.
Tata plans to sell $2.4 billion of stock to shareholders and investors abroad in the second-biggest fund-raising plan by an Indian company. The rights shares will be sold at 300 rupees apiece, almost half the prevailing market price. Shareholders will get one share for every seven held.
The company hasn’t set a date for the sale.