DEAL WILL REVIVE SENTIMENT: TATA STEEL
The deal to combine the European businesses of Tata Steel and ThyssenKrupp into an equal joint venture should provide relief to investors in the former.
For one, the terms are largely as indicated in the memorandum of understanding (MoU) signed in September last year. Till the details were known, Street concerns were elevated. For, reports suggested both entities might have to re-assess the worth of their operations and deal valuation, as ThyssenKrupp had done better than Tata Steel Europe after the MoU. And, buzz that with a large global investor, Elliott Management Corporation, increasing its stake in ThyssenKrupp (and pushing for a re-evaluation), this could adversely influence the deal.
As a result of these concerns, Tata Steel’s share price had fallen a little more than 12 per cent since mid-May, lagging top domestic peers in the past three to six months. However, it was the biggest gainer among Sensex stocks on Friday with news of the deal. Analysts now say there could be more upside for the company.
Abhisar Jain at Centrum Stock Broking said it had got very good terms, almost on the same lines as indicated in the MoU. The 10 per cent warrant to be issued to ThyssenKrupp will get monetised at the time of the IPO of equity and is the only additional benefit for the latter.
Kamlesh Bagmar at Prabhudas Lilladher adds that if the IPO valuation increases, the residual value for Tata Steel also rises and, hence, it is not a big concern.
The other positive is that dividend distribution from the joint venture (JV), to be called ThyssenKrupp Tata Steel BV, would be equal for both partners (even with the warrants).
On the one hand, debt of the Tata Steel group gets reduced by 2.5 billion (~200 billion), as it will be transferred to the JV along with the European steel assets. In addition, the company plans to use dividends received from the JV to service another ~170 billion of debt of Tata Steel Singapore (related to the European operations). Tata Steel’s consolidated debt as on end-March stood at ~692.1 billion. Despite the new debt Tata Steel will be taking for acquisitions (such as for Bhushan Steel), it is in much better terms on loan dues, says Jain of Centrum Stock Broking.
Sanjay Jain at Motilal Oswal Securities adds that 2.5 billion in debt which has been passed to the JV was not being serviced by Tata Steel’s Europe operations. It is actually a leakage of cash-flow for the company’s consolidated balance sheet and, hence, this liability moving away is good news.
Additionally, Tata Steel will now not have to commit fresh yearly investments, which it had been doing to fund the European operations. It can fully concentrate on its more profitable Indian operations. With the Kalinganagar (Odisha) expansions and acquisition of Bhushan Steel, their volume growth is likely to remain good. With the realisation trend in India supportive, expect the financials to improve. The Indian operations reported a per-tonne operating profit of ~15,932 for the March quarter, more than thrice the ~4,535 reported by its European one.
There are, however, some concerns for the Indian operations. One is regarding captive iron ore at Bhushan Steel, given the uncertainty around regulatory approvals. Two, some overhang on how the Bhushan Power bid and its funding will progress. Even so, analysts are positive on its India business.
The JV is generating about 1.5 billion in yearly operating earnings on a proforma basis and should see synergy benefits of 400-500 million over the next 12-24 months. Since about a third of the latter are on account of procurement and about a fifth on network optimisation, these benefits might accrue in the first 12 months and improve profitability.
For further improvement in profit at the JV, they will have to work on technology upgradation, etc, requiring capital expenditure (capex). Also, the challenges posed by the impact of US tariff rises and currency fluctuation, among others.