'Tata Steel's Thyssenkrupp JV to help improve credit profile'

International rating agency Fitch today said Tata Steel Europe's agreement with German industrial major Thyssenkrupp to create a joint venture will improve its credit and business profiles as it will reduce its exposure to structural weaknesses in the region.

However, the gain will probably be offset by a relatively high level of leverage over the next two to three years due to acquisitions back home to expand market share, the agency warned in a report.

It also hinted at resolving the rating watch on the ratings of both the companies after the completion of the JV transaction by 2018-end.

Loss-making Tata Steel Europe and Thyssenkrupp had on June 30 singed an agreement to form a 50:50 joint venture, which will be the second-largest European flat-steel producer with annual shipments of about 21 million tonne.

Tata Steel will transfer around 2.5 billion euros of term debt to the JV, while Thyssenkrupp will transfer pension liabilities of 3.6 billion euros.

The JV will make cost synergies of 400-500 million euors annually to be realised within two-three years.

"Leverage remains a concern for Tata Steel. We estimate the ratio of total adjusted debt to pre-tax profit will remain above four times over the next three years, little changed from the 4.4 times leverage in the year to March 2018. This is significantly higher than the level of around 2.5 times for a 'BB' category rating in general, as per our rating," Fitch said.

Tata Steel is on an acquisition spree back home with snapping up Bhushan Steel for over Rs 35,000 crore and Bhushan Power & Steel for Rs 24,200 crore, apart from an over Rs 23,00 crore expansion of its Kalinganagar plant. This will increase its debt by around Rs 80,000 crore.

"We have assumed Ebitda of around Rs 45,000 crore from Bhushan Steel in FY20, based on an output of five million tonne and an Ebitda per tonne of around Rs 9,000 for the plant, which does not benefit from the use of captive raw materials," the agency said, adding the company will have around Rs 10,000 crore annual capex over the next three years.

The agency sees an operating margin of per tonne for its domestic operations (ex-acquisitions) of around Rs 13,000 in FY19, similar to the FY18 level, dropping slightly to around Rs 12,500 annually thereafter.