ThyssenKrupp. Photo: Reuters.
The deal to combine the European businesses of Tata Steel and ThyssenKrupp into an equal joint venture should provide relief to investors of Tata Steel.
For one, the terms are largely in line with those indicated in the Memorandum of Understanding (MOU) signed in September last year. Until the details were known, there was much concern as reports suggested that both the firms might have to reassess the worthiness of their operations and deal valuations in light of ThyssenKrupp having performed better than Tata Steel Europe
post the signing of the MOU. There was also buzz that with a large global investor, Elliott Management Corporation
increasing its stake in ThyssenKrupp (and pushing for a re-evaluation), it could likely have adverse influence on the deal.
As a result of these concerns, Tata Steel’s share price had corrected more than 12 per cent since mid-May, and had lagged top domestic peers in past 3-6 months. However, it was the biggest gainer amongst Sensex stocks on Friday as news of the deal going through crept in. Analysts now say, there could be more upside for Tata Steel.
Abhisar Jain at Centrum Stock Broking said that Tata Steel has been able to get away with very good deal terms, almost on same lines as indicated in the MOU. The 10 per cent warrant to be issued to ThyssenKrupp will get monetised at the time of IPO and is the only additional benefit for the latter, and hence the deal is quite a positive development for Tata Steel.
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 the dividend distribution from the joint venture, to be called ThyssenKrupp Tata Steel BV, would be equal for both the partners (notwithstanding the warrants). So, while on one hand the debt of Tata Steel group gets reduced by Euro 2.50 billion (about Rs 200 billion), as it will be transferred to the JV along with European steel assets, the company also plans to use dividends received from the joint venture to service another Rs 170 billion of debt of Tata Steel Singapore (related to European operations).
Tata Steel’s consolidated net debt as on 31st March stood at Rs 692.15 billion.
Notwithstanding the new debt, Tata Steel will be taking for acquisitions (such as Bhushan Steel), it is in much better terms on debt, says Jain of Centrum Stock Broking.
Sanjay Jain at Motilal Oswal Securities adds that the Euro 2.5 billion debt, which has been passed to the joint venture, was not being serviced by Tata Steel’s Europe operations and it was actually a leakage of cash-flows 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, and it can now fully concentrate on its more profitable Indian operations. With the Kalinganagar expansions and acquisitions of Bhushan Steel, Tata Steel’s volume growth is likely to remain good. With realisation trend in India currently supportive, expect Tata Steel’s financials to improve. Its Indian operations had reported per tonne operating profit of Rs 15,932 for March quarter, more than thrice the Rs 4,535 reported by its European operations.
For Indian operations, however, there are some concerns. One is regarding captive iron ore at Bhushan Steel, given uncertainty around regulatory approvals, and secondly, some overhang on how the Bhushan Power bid and its funding will progress. Nevertheless, analysts still remain positive on its India business.
Meanwhile, the joint venture, which is generating about Euro 1.5 billion in earnings before interest, tax, depreciation and amortisation (Ebitda) on a proforma basis, is expected to see synergy benefits of Euro 400-500 million over next 12-24 months. Since about a third of synergies are on account of procurement and about a fifth on network optimisation, these benefits may accrue in the first 12 months and improve profitability.
For further improvement in profitability of joint venture, they will have to work on technology upgradations, etc requiring capex besides handle challenges posed by impact of US tariff implementations and currency fluctuations among others.
So, while Tata Steel says that it will be utilising dividends from joint venture to reduce debt, it remains to be seen if the inflow will be adequate to meet the debt obligations and capex requirements of the joint venture.