Lower debt, increasing stability in costs and pricing will protect the company from more shocks.
Tata Steel will issue additional shares and warrants on a preferential basis to Tata Sons. The move to issue around 15 million equity shares and 12 million warrants could see dilute Tata Steel’s equity by around 2.8 per cent.
The shares will be priced around Rs 594 per share — a 17.5 per cent premium to the current market price. This is expected to mop up Rs 1,600 crore after the conversion of warrants, according to analysts.
On the face of it, the amount looks inconsequential as the consolidated debt on the books of Tata Sons is around Rs 53,100 crore. The debt to equity ratio would, however, come down from 2.3 times to 2.15 times and lower the interest outgo. Moreover, Tata Steel paid 70 per cent debt obligations for financial year 2011 in May. There is expectation it will repay more debt.
The company is expected to see strong volume growth and stable operating profit margins in financial year 2011, according to analysts. In fact, analysts at Ambit Capital expect sales volume of 15 million tonnes, with the first half being more robust than the second (as the winter season could reduce demand). Earnings before interest, tax, depreciation and amortisation (Ebitda) margins are expected to stabilise at lower levels. The strong $96-a-tonne Ebitda margins would stabilise to a more rational $65 a tonne level within the current financial year, said analysts.
Fortunes of Corus will remain crucial for the company as Tata Steel India’s operations, which will contribute around 33 per cent of volume sales and 60 per cent of consolidated Ebitda, are expected to remain stable. Analysts say the stability in earnings is expected to continue and the company will not see the shocks it faced in FY2009, when realisations crashed even when raw material prices continued to remain high and the drag on profits continued into the first half of 2010. A more practical quarterly raw material pricing will ensure this, they say.
