Graphic: Mint
Graphic: Mint

Tata Steel is not willing to give even an inch on the acquisitions front

At a time when its balance sheet is getting stretched by acquisitions, with more in the pipeline, investors would like to see how Tata Steel intends to make this acquisition work

Tata Steel Ltd will pay 4,300-4,700 crore to acquire the domestic long steel business of Usha Martin Ltd, which seeks to lower its stand-alone debt of 3,484 crore. Usha Martin will now focus on its wire and wire ropes business.

An insatiable appetite for acquisitions led Tata Steel to make its latest acquisition, despite the fact that the profitability of the Usha Martin unit is relatively low. Tata Steel will have a task on its hand to improve the performance of the steel business. Earlier this year, Tata Steel had picked up Bhushan Steel Ltd, and remains in the fray to acquire Bhushan Steel and Power Ltd.

The price for the Usha Martin unit was not cheap either. Consider what JSW Steel Ltd, which gets most of its revenue from India, trades at—a market capitalization-to-sales ratio of 1.4 times its FY18 revenue. Its profitability is way ahead of Usha Martin. Even then, Tata Steel agreed to pay 1.3-1.4 times the company’s FY18 revenue.

Now, Usha Martin comes with a one-million-tonne-per- annum long steel plant, very near Tata Steel’s Jamshedpur operations. It also has an iron ore mine, a coal mine under development and captive power plants. This means that on the raw material front, other than working towards making the coal mine operational, there is little to be done that can lower costs.

Usha Martin had said how rising costs of input, such as coking coal, had affected its revenue in FY18. Savings can be earned on procurement, logistics and marketing by being part of Tata Steel. But the gap in profitability is significant.

In FY18, Tata Steel’s India business had a segment Ebit (earnings before interest and tax) margin of 26%, compared to Usha Martin’s steel business, which earned a segment margin of 2.9%. This improved in the June quarter, with Usha Martin’s profitability improving to 10.8%, but lower than Tata Steel’s 31.2%. That’s a wide gap in the profitability.

Usha Martin’s revenue is relatively low at 5.6% of Tata Steel’s business and the overall impact will not be much. Still, Tata Steel will certainly like to improve its profitability. The company has, however, not said how it intends to achieve that. Tata Steel could improve utilization rates for now and later invest in capacity expansion and modernization. Since its own integrated steel operations are nearby, the company also has the option to bring operational changes or utilizing some of its raw material sources for its requirements.

Tata Steel’s shares fell by 2.9% on Monday, but this was in line with the decline in steel stocks. The Usha Martin acquisition will not move the meter much, but at a time when its balance sheet is getting stretched by acquisitions, with more in the pipeline, investors would like to see how Tata Steel intends to make this acquisition work.

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