Tata Steel's acquisition of NINL to strengthen long-steel output: Moody's

Moody's Investors Service on Monday said the acquisition of Neelachal Ispat Nigam Ltd by Tata Steel arm is credit positive because it will increase the subsidiary's long-steel production capacity

Moody's Investors Service on Monday said the acquisition of Neelachal Ispat Nigam Ltd (NINL) by Tata Steel arm is credit positive because it will increase the subsidiary's long-steel production capacity and its reserves of iron ore.

Last month, Tata Steel had announced winning the bid for acquiring 93.71 per cent stake in Odisha-based NINL for Rs 12,100 crore.

"On January 31, Tata Steel Ltd (TSL, Ba1 stable) announced that its 74 per cent-owned subsidiary Tata Steel Long Products Ltd (TSLP) will acquire a 93.7 per cent stake in Neelachal Ispat Nigam...The acquisition will give TSL access to NINL's 1.1 million tonnes per annum (MTPA) of long-steel producing capacity, 100 million tonnes of iron ore reserves and 2,500 acres of land," Moody's Investors Service said in a statement.

Still, NINL is loss-making and Moody's Investors Service said that it believes that the acquisition price largely reflects the steel plant, iron ore reserves and the land acreage that can accommodate capacity expansions.

And, while the acquired operations are substantially smaller than TSL's current global capacity of 32.5 MTPA, including its 19.6 MTPA capacity in India, it is credit positive because it will increase TSL's long-steel product capacity and increase its reserves of iron ore.

TSL expects to fund the acquisition through a combination of internal accruals and debt.

"Even assuming the USD 1.6 billion enterprise value is paid entirely through debt, we estimate TSL's proforma leverage at September 2021 would climb to 1.8x. To the extent the acquisition is funded through internal accruals, the peak pro forma leverage would be less than 1.8x. Even so, with a rating downgrade leverage threshold around 3.5x, there is a sufficient buffer in TSL's financial metrics to accommodate the proposed acquisition," the statement said.

Since March 2020, TSL has reduced its adjusted gross consolidated debt including interest bearing customer advances, which we treat as debt by around 30 per cent.