Tata Steel's Bhushan buy to raise net leverage over next 2-3 years: Fitch

Move to offset benefits to Tata Steel's credit profile from reduced exposure to structural weaknesses in Europe

Tata Steel's acquisition of a controlling stake in debt-laden Bhushan Steel is likely to raise the former's leverage over the next two to three years, Fitch Ratings said on Wednesday.

The move would also offset benefits to Tata Steel's credit profile from reduced exposure to structural weaknesses in Europe and resultant increase in market share in India, said the report.

The Bhushan acquisition will enable Tata to improve its domestic market share, but Fitch estimates it will raise the latter's leverage, in terms of net debt to EBITDA, to 4x over the next two to three years from around 3x at end-March 2018.

Tata Steel's net debt will increase by around Rs 350 billion due to the acquisition, excluding additional working capital debt at Bhushan.

"We assume additional EBITDA of around Rs 45 billion in the second year following the acquisition, based on an output of 5 million tonnes and an EBITDA per tonne of around Rs 9,000, based on Tata Steel's successfully improving operations at Bhushan to near-optimum levels within two years," said Fitch.

Tata Steel has now cleared all the regulatory hurdles needed to proceed with the acquisition after India's National Company Law Tribunal (NCLT) approved the company's debt resolution plan for Bhushan on 15 May 2018 and the anti-trust regulator gave the greenlight in April.

Neeraj Singal-promoted Bhushan Steel, which has steelmaking capacity of around 5 million tonne, was one of five key distressed steel assets put up for bidding under insolvency proceedings in India.

Under the resolution plan, Bhushan's financial creditors will receive Rs 352 billion for settlement of existing financial debt. This amount will be financed with new secured debt of Rs 165 billion and cash on Tata Steel's balance sheet.

The company will subsequently acquire a 72.65 percent stake in Bhushan.With the acquisition, Tata Steel's projected steelmaking capacity will increase to 23 million tonne including the company's own 5 million tonne capacity expansion scheduled to be completed in 2022. This is in line with management's intention of doubling capacity in India from 13mtpa in the next five years.

Bhushan's main plant is relatively close, about 150km away from Kalinganagar plant in Odisha in eastern India.

Bhushan's plant is underutilised, producing around 3.5mtpa currently. Tata Steel believes its turnaround plan will enable the plant to reach close to 100 percent utilisation in two years.

Bhushan's plant, unlike Tata Steel's, does not benefit from use of captive raw materials currently. However, Tata Steel envisages gains from improvement in operating metrics and from unified marketing and procurement, said Fitch.

Bhushan's product mix is enhanced by downstream facilities like its cold-rolling mill and galvanizing units.

Moreover, Tata Steel also has the option to increase capacity at Bhushan's site in the future, which is useful given the significant time required to set up a green field plant in India.

Tata Steel has also shown interest in acquiring a controlling stake in another steel asset - Bhushan Power and Steel. The result of that bidding process is likely to be known within the next few months. A successful bid is likely to further increase TSL's leverage over the medium term, Fitch informed.