Domestic landmark

IFR Asia India Report 2013
6 min read

A labourer stands outside a Tata Steel stockyard in the northern Indian city of Chandigarh.

Source: Reuters/Ajay Verma

A labourer stands outside a Tata Steel stockyard in the northern Indian city of Chandigarh.

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As the world economy plods towards a slow and protracted recovery, Tata Steel is finding salvation at home in India. It has been an eventful summer for Tata Steel. With a non-cash write-down of goodwill and assets to the tune of Rs 83.56bn (US$1.6bn), the company finally came close to a public admission of pricing and timing issues with its high-profile acquisition of Corus Steel more than five years ago.

The impairment charge goes some way to wiping the slate clean early in the tenure of new Tata Steel chairman Cyrus Mistry. Steel demand in Europe, in aggregate terms, is down almost 30% since Tata Steel paid US$13bn to take over Corus in 2007 and a rerating of cash-flow expectations from the European business shifts the spotlight back on the company’s Indian expansion.

The Corus legacy is, however, far from wiped out, with nearly half of Tata Steel’s operating profit used to service net debt of close to Rs600bn as of June – most of it related to the acquisition.

More financing is in the pipeline as the company undertakes an unprecedented expansion of its Indian operations – a near doubling of capacity in a span of five years. On top of a brownfield expansion in Jamshedpur that will add 2.9m tonnes per annum, the company is already working on the first phase of a 3mtpa greenfield development in the eastern coastal Indian state of Odisha.

Tata Steel Odisha’s Rs228bn local currency project financing will be drawn over the next five years and is to be repaid over 12 years. The crucial financing is one of the largest such package, on record in India.

“Financing for the Odisha project was a specific risk to the group, given the volatility in the global financial markets and the availability of credit,” states the latest annual report.

Despite tying up the funds, the company has not drawn down on the credit lines so far. It has spent over Rs95bn so far with nearly Rs20bn in the April–June 2013 in Odisha. It has used internal cash generation to support the capital expenditure and that possibility is likely to accelerate as the impact of the brownfield expansion is felt.

Mumbai-based independent analyst Arun Kejriwal believes the Odisha project is critical for Tata Steel.

“It is a significant ramp-up on a new site and it is the first major project due for delivery under chairman Mistry,” he said.

Given the fate of other metals-and-mining projects in India, there has been some apprehension about the execution of this project. So far, the Tatas seem to be getting their basic steps right with land and construction approvals, helping convince domestic banks to lend to the company.

For KR Kamath, chairman and managing director of Punjab National Bank, the jumbo financing proves there is no lack of funds for projects with requisite approvals and sponsors with established track records.

The rupee depreciation of almost 20% since April, debt revaluation and more expensive imports add to the challenges facing the company. Given its heavy debt profile, rating agencies are keeping a close watch on its finances, but Tata Steel has shown itself to be adept at securing funds from a variety of sources.

“Financing for the Odisha project was a specific risk to the group, given the volatility in the global financial markets and the availability of credit.”

Finding a market window in April, the company raised S$300m (US$236m) from its first Singapore dollar bond issue at an unusual 10-year maturity. As of the end of June, the company reported a comfortable liquidity position of over Rs171bn against capex of Rs37.64bn.

India Ratings and Research has Tata Steel’s AA rating on a negative outlook, and is watching for any change in the company’s net debt-to-Ebitda ratio. A decisive and sustained drop below 4x will probably help revert the outlook to stable, according to Rakesh Valecha, senior director, corporates, at India Ratings.

Yet, Valecha believes the impact on Tata Steel could be marginally positive because of hedging and the import-price-parity pricing in India.

“Rupee depreciation is not likely to result in a straightforward gain or loss for the company. The company’s exports offer a natural hedge even as the company’s imports of coking coal are limited due to captive sources,” he said.

Many analysts are not impressed with Tata Steel’s debt-fueled growth strategy, arguing that it hurts shareholder returns. Yet, a number of them are now willing to buy the story. Ambit Capital analyst Parita Ashar has maintained a buy call on the stock after the latest results, and sees positives in “the rising proportion of the India business in the overall sales mix and initial signs of a recovery at Tata Steel Europe”.

Then, there are some like Kejriwal, who believe the stock could benefit in years to come from a cyclical upturn in the steel industry.

“It is a leaner, meaner and much fitter company now.”

Domestic landmark