Tata Steel's proposed acquisition of Usha Martin's speciality steel business will improve the share of its long steel products at no additional leverage, according to two international rating agencies.
Tata Steel, which has a capacity of 27.5 million tonne, has a disproportionate skew towards flat steel products currently, while Usha Martin has an integrated steel-making business with predominantly long steel products, which fetch higher margins.
The steel business of Usha Martin, which is amongst the top five wire rope manufacturers in the world and a leading speciality steel producer in the country, comprises the specialised one-million tonne alloy-based capacity in the long products segment in Jamshedpur, a producing iron-ore mine, a coal mine under development and captive power plants.
The deal is expected to be completed over the next two to three quarters.
Analysing the impact of the deal, global rating agencies S&P and Moody's Tuesday said the purchase is credit positive for Tata Steel as it widens its product portfolio to the high margin long products segments, where the Tatas are not strong now, without impacting the company's financial profile or leverage as the deal will be an all-cash one.
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In one of the largest debt resolution case outside the NCLT, the Usha Martin board had on September 22 signed an agreement with Tata Steel to sell the Kolkata-based firm'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 3,700 crore and a revenue of Rs 3,441 crore 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.
"Acquisition is credit positive for Tata Steel as it will help it strengthen the overall business as well as expand its presence in the eastern market. The deal will have no immediate ratings effect," Moody's said in a statement.
Echoing earlier views, S&P said, "At the proposed transaction value of Rs 4,300-4,700 crore, 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."
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".
Moody's said the acquisition will help Tata Steel further widen its long products offering and increase the proportion of value-added goods in its product mix.
Moreover, the captive raw material sourcing at Usha Martin's operations will supplement Tata Steel's existing business, which is also vertically integrated, thus alleviating any concerns about the sourcing as it continues to expand its production capacity both organically and inorganically, it noted.
The Tata Steel counter closed 1.10 per cent lower at Rs 599.95 apiece on the BSE Tuesday, against 0.96 per cent rise in the benchmark.
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