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Wednesday, Oct 16, 2019

Tata Steel to benefit in the long-term

Once completed, Tata's acquisition of Corus will create the second-largest steel co in Europe after Arcelor Mittal, reports Suprotip Ghosh.

india Updated: Feb 01, 2007 00:44 IST
Suprotip Ghosh
Suprotip Ghosh

Besides rearranging global steel geography forever, Tata Steel’s buyout of Corus has sent jitters in the Indian stock markets, with the stock crashing over seven per cent in the early hours of trade Wednesday morning. However, the street feels that the there is no undue worries for the scrip in the medium to long term.

Once completed, Tata Steel’s acquisition of Corus would create the second-largest steel company in Europe after Arcelor Mittal, the $33.2 billion steel giant that holds 10 per cent of the total steel produced in the world.

This means Indians would be at the helm of affairs among European steel producers. The two companies produced 132.8 million metric tonnes between them steel last year, while entire Europe produced 219.5 million metric tonnes of steel in the same period.

According to street calculations, Tata Steel would have a debt component of $ 2.8 billion (Rs 12,350.80 crore), the rest being serviced through preferential allotment of shares and cash balance available to the company.

Given a rate of seven per cent, interest on the debt component comes to less than Rs 1,000 crore. Worries over the debt component caused the morning crash in the scrip on the benchmark BSE Sensex, said Deven Choksey of K R Choksey Securities. The scrip ended the day down at Rs 463.95.

The long-term view, though, is favourable. The acquisition would create significant savings in operating expenditure in the combined entity, which is expected to reflect on the balance sheet in the coming quarters.

"The synergies would be put into place through the coming quarters, and the global plans for Tata Steel would pan out in the same quarters over the next two to three years," B Muthuraman, MD, Tata Steel said at a press meet on Wednesday.

The other positive of the deal is movement of technical knowhow from the British steelmaker to its Indian partner. This is expected to increase the fundamental strength of Tata Steel in the coming years, given that the volume, as well as the quality of output from the company is expected to be on a confirmed move upwards, said an analyst.

Overall, the steel sector is expected to move into a second round of consolidation with the Chinese steel industry moving towards a rejig. The same phase of consolidation is expected to continue in Europe and US, with Arcelor Mittal picking up Sicartsa, a Mexican steel company for $ 1.4 billion.

First Published: Feb 01, 2007 00:44 IST

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