Shares of Bhushan Steel, however, went up by 20 per cent to Rs 53.80, as investors expected a turnaround under the Tata management.
Some analysts, however, said the threat of winner’s curse for Tata Steel is over-rated. “At first glance, both the acquisitions look expensive with enterprise value per tonne of $1,125-1,225 — higher than the Kalinganagar Phase-2 expansion of $750 a tonne and industry benchmark of $1,000 a tonne for an integrated plant up to HR (hot rolled) coil stage. But we perceive long-term potential upsides from Ebitda (earnings before interest, tax, depreciation and amortisation) improvement — from the current Rs 7,800 a tonne at 58-60 per cent utilisation to Rs 11,000 a tonne via enhanced capacity utilisation; efficient raw material sourcing and operating synergies; market leadership in automotive steel segment; and possibility of further brownfield expansion at Bhushan Steel,” analysts with Edelweiss Financial said.
Sources said maybe the market overreacted because Bhushan Steel has a liquid steel capacity of 5.6 million tonnes (mt) and finished steel capacity of 5 mt. But without much investment, sources indicated that the finished steel capacity could be ramped up to 8 mt. But beyond 8 mt, the company would need more land.
Plus, Bhushan Steel has an iron ore mine with reserves of 100 mt that it bagged through e-auction. The mines have high-grade reserves with 60-63 per cent iron content.
Tata Steel, too, has iron ore, manganese, chromium ore mines in Odisha. It can apply for more mines and a substantial presence in Odisha with its Kalinganagar plant, which has a capacity of 3 mt. The company’s board has approved the second phase of expansion of 5 mt.
Tata Steel would also benefit from Bhushan Power & Steel, which has a 2.5-mt HR capacity and 1.3-mt cold-rolled capacity. The steel making capacity can be ramped up to 3.5 mt at a nominal investment. Bhushan Power & Steel has also bagged an iron ore mine, which has reserves of around 81.9 mt.