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Business News/ Market / Mark-to-market/  Tata Steel hitches itself firmly to India’s economic growth story
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Tata Steel hitches itself firmly to India’s economic growth story

The conditions are mostly in favour of Tata Steel, what with global steel demand going up and its Bhushan Steel acquisition, but there's always the risk that some external factor could go wrong

Tata Steel’s debt will increase to the extent the Bhushan Steel acquisition involves taking on existing debt, and lead to higher interest costs.Premium
Tata Steel’s debt will increase to the extent the Bhushan Steel acquisition involves taking on existing debt, and lead to higher interest costs.

Fiscal year 2019 (FY19) will see Tata Steel Ltd turn into a rather different company, compared to how it exited 2018. The anticipated moving of its European steel business to a joint venture (JV) with Thyssenkrupp AG and its successful acquisition of Bhushan Steel Ltd (barring any litigation-related outcomes) will reshape its balance sheet, geographical mix of revenues and profitability. How this shapes up and the direction of steel prices are critical factors for investors to watch.

ALSO READ: Bhushan promoters in last-ditch effort to halt takeover by Tata Steel

Tata Steel Q4 results showed an 8% increase in revenue sequentially and nearly a one percentage point increase in its Ebitda (earnings before interest, tax, depreciation and amortization) margin. During the quarter, its India business volumes suffered due to an outage at a blast furnace in Odisha.

Thus, while Ebitda/tonne rose by 8.4% sequentially, the decline in revenue held back India’s contribution to profit growth. Since the March quarter was a seasonally strong one compared to the preceding quarter, Europe contributed much better. Tata Steel said better prices across markets helped its performance, partially offset by higher costs in India and higher input costs in Europe.

In the near term, the India business will see volumes recover as the blast furnace problem has been corrected. That should see its sequential performance improve. Steel prices are holding steady. The bigger impact on the India business will be the Bhushan Steel acquisition for Rs35,200 crore, to be done via a subsidiary. The company will hold a 72.5% stake in Bhushan Steel which will see it increase its market share in its profitable home market.

There are some short-term effects one can expect. Tata Steel’s debt will increase to the extent the acquisition involves taking on existing debt, and lead to higher interest costs. Consolidation means Bhushan Steel’s performance will reflect in the company’s financials also. Although Bhushan Steel was profitable at the Ebitda level, it could not service debt. Also, a clean-up of its books post-acquisition may also see some accounting-related impact on Tata Steel’s financials.

Once these settle, the focus will shift to the company’s ability to invest in Bhushan Steel’s operations, so that it operates at optimal capacity and at a lower cost. These and cost savings due to integration could make the acquisition worthwhile.

The European JV is taking longer than expected to be set up, and is now being pegged for end-June. A JV will mean an increase in Tata Steel’s profitability as well as lower its debt burden. The timing could help it absorb the effect of the Bhushan Steel acquisition. Tata Steel is also a bidder in the resolution for Bhushan Power and Steel Ltd, which can further stretch its financials.

While these events will play out in FY19, the overarching factor to watch is the direction of steel prices. Good demand for steel globally is expected to keep prices stable and iron ore prices too have been holding up well. The conditions are mostly in favour of Tata Steel, both in terms of performance and supportive of its endeavour to add/restructure its operations. That does raise the risk that some external factor could go wrong.

Tata Steel’s shares fell by 1.9% on Thursday, reacting to its results but they have been rising in May and are still up by 6.1% since the start of the month.

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Published: 18 May 2018, 08:58 AM IST
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