Mumbai: India’s largest private steel maker, Tata Steel Ltd, plans to list Tata Steel Global Resources Ltd, the holding company for its steel and raw material assets outside India, on the London Stock Exchange (LSE) to raise funds for acquiring iron ore and coal mines.
It will also use the funds to repay part of the debt it took to buy Corus Plc., a 20-million-tonne steel maker in the UK, in 2007. Corus, which was delisted in April 2007, will be a part of the holding company, according to a person familiar with the development, on condition of anonymity.
Preliminary work on listing Tata Steel Global has begun at Bombay House, the headquarters of Tata Sons in Mumbai, this person said.
Going places: Tata group chairman Ratan Tata. (Madhu Kapparath / Mint)
Holding companies are non-operating firms that own stakes in operating entities to unlock value, a concept well accepted in global markets.
“We will reorganize our group structure to unlock shareholder value over the next 6-12 months for growth in raw material assets and new market strategies,” Tata Steel’s chief financial officer Koushik Chatterjee had said in the company’s latest interaction with the press to discuss full-year results. “We are looking at an overseas group structure below Tata Steel to create the appetite for acquisitions. Since it would require capital, we are looking at various options.”
A detailed questionnaire sent to Tata Steel didn’t elicit a response.
Vedanta Resources Plc., owned by billionaire Anil Agarwal, was the pioneer in listing a metal firm overseas in 2003, followed by Aditya Birla Minerals Ltd in Australia.
Vedanta Resources raised £825 million (more than Rs7,000 crore today) after it sold a 46% stake to overseas investors. Its share price has appreciated around 500% to £20 a share since its listing at £3.83 a share.
The European market will reward the fundamentals of Tata Steel more than Indian bourses are doing, claimed a senior Vedanta Resources official, who works closely with Agarwal, but didn’t want to be named.
Last month, Vedanta Resources raised $1.25 billion (Rs5,388 crore today) in three days after it issued five-year and 10-year bonds, just after its bid to buy bankrupt US-based mining firm Asarco Llc.
“If Tata divests about 25% of the holding company (Tata Steel Global), it will be able to raise $5-6 billion,” said Om Damani, a stock broker with research firm Ideas First Information Services. Damani has been tracking the steel industry for some five years.
As on 31 March 2007, Tata Steel had a total debt of Rs9,645 crore, in both secured and unsecured loans. For the fiscal year ended March, Tata Steel paid a consolidated net interest of Rs4,184 crore, up from Rs411 crore last year.
Tata Steel, along with its associates, has operations in 24 countries and commercial presence in more than 50 countries. The steel maker owns Corus, Tata Steel Thailand (formerly Millennium Steel) and NatSteel Asia.
The company is also working jointly with Vietnam Steel Corp. to develop a steel complex in Ha Tinh in Vietnam, with an estimated capacity of 4.5 million tonnes per annum (mtpa). In Australia, Tata Steel has a joint venture in Carborough Downs Coal Project located in Queensland, which has a mining capacity of 58mt of raw coal for 14 years.
In India, Tata Steel has enough raw material, mainly iron ore, to feed its plant in Jamshedpur, but Corus is still largely dependent on its long-term contracts and spot purchases to produce about 20mtpa of steel.
This has been hurting Tata Steel’s consolidated results since its acquisition of Corus. The two entities together hold reserves to meet just about 20% of their raw material requirements, increasing the cost of steel production.
Iron ore prices have risen by about 65% in recent months and cooking coal by 100%, and steel companies are scrambling to grab whatever mining assets they can to counter any further rise. Rising raw material prices had impacted performance in the December quarter severely, when the operating profit margin of Tata Steel’s overseas subsidiaries had fallen to 6.9%, from 9.8% in the September quarter and 11.8% in the June quarter.
Corus accounts for about 88% of the overseas subsidiaries’ total profits. Tata Steel’s Indian operations, however, reported good numbers, with the operating margin continuing to hover around 42%.
Valuations of mining companies are high and rising, as they benefit from an increasing demand from China.
Tata Steel had completed the acquisition of Corus in 2007 in a £6.2 billion deal to become the world’s sixth largest steel maker by capacity. Corus accounts for 72.5% of the firm’s consolidated revenues.
Shares of Tata Steel, which closed at Rs677.90 on the Bombay Stock Exchange on Wednesday, have lost about 27.50% since the start of the year, compared with the 31.17% drop in the benchmark index Sensex.