Usha Martin buy to improve Tata Steel's product portfolio, says S&P report

Tata Steel has a disproportionate skew towards flat steel products now while Usha Martin has an integrated steel-making business with predominantly long steel products which get better margins

Tata Steel's acquisition of Usha Martin's speciality steel business will improve the share of long steel products in its business at no additional leverage, says a report.

Tata Steel, which has a capacity of 27.5 million tonne, has a disproportionate skew towards flat steel products now while Usha Martin has an integrated steel-making business with predominantly long steel products which get better margins.

In one of the largest debt resolution plans outside the NCLT process, the Usha Martin board had signed an agreement with Tata Steel on September 22 to sell the Kolkata-based company's steel and wire rope business for a cash consideration of up to Rs 4,300-4,700 crore in a slump sale.

Usha Martin, which had a debt of over Rs 37.00 billion and a revenue of Rs 34.41 billion in the last fiscal year, had informed the exchanges that the sale would bring down the debt significantly. SBI is the lead banker for the group's debt.

"At the proposed transaction value of Rs 43.00-47.00 billion, we do not expect the acquisition to have a material negative impact on Tata Steel's financial profile or leverage. We expect the company to pay in cash for the acquisition, which is through a slump sale. The acquisition will also improve its product portfolio," S&P said in a note Tuesday. Given the robust prices and strong volume outlook for the domestic steel market, S&P expects "Tata Steel to continue with its strategy of bidding for bankrupt steel assets as it strives to maintain leadership in a high growth market."

Last Saturday, Tata Steel had said it had agreed to snap up the Usha Martin said they fund use from slump sale But Monday, the promoters Basant and Prashant Jhawar, sought transparency on fund utilisation from the board of the company saying as of now there is no clarity on who'll get how much from the sale proceeds.

"Though we are encouraged by the Tatas signing an agreement with the current management of Usha Martin, the end use of the funds is opaque," Usha Martin founder Basant Jhawar and his son Prashant, who together own 25 per cent stake in the company, said in a statement Monday.

The deal is expected to be completed over the next two-three quarters.

Usha Martin's steel business comprises the specialised one-million tonne alloy-based manufacturing capacity in long products segment in Jamshedpur, a producing iron-ore mine, a coal mine under development and captive power plants.

Usha Martin is amongst the top five wire rope manufacturers in the world and a leading speciality steel producer in the country.

In May, Bamnipal Steel, a wholly-owned subsidiary of Tata Steel, completed the acquisition of controlling stake of 72.65 per cent in Bhushan Steel, for a consideration of Rs 352.00 billion, though the insolvency auction process.