Are Tata Steel’s Bids For Bhushan’s Twin Stressed Assets Too High?
Tata Steel Ltd.’s highest bids for insolvent Bhushan Steel Ltd. and Bhushan Power & Steel Ltd. may take it a step closer to reclaiming its title as India’s No. 1 steelmaker. Yet, analysts flagged concerns that it may have been too aggressive.
Tata Steel offered to pay up to Rs 45,000 crore for Bhushan Steel and Rs 24,500 crore for Bhushan Power, BloombergQuint earlier reported citing people not willing to be identified. Which means, it’s valuing the stressed assets much higher than the industry average.
This definitely doesn’t seem to be a right move, Dharmesh Kant, independent market expert, told BloombergQuint. “Corus acquisition too was done at higher valuations which led to depressed financials. Now, bidding for both these companies could undo the recovery.”
Shares of Tata Steel declined as much as 7.3 percent, the most in 15 months, today in the first day of trading after reports said that it bid the most for the two stressed assets, ahead of rival JSW Steel Ltd. The aggressive offer comes at a time India’s steel demand is expected to revive as the government builds new roads and ports and an economic recovery is underway.
The $13.5-billion Corus acquisition of 2007 had come at the peak of the global growth cycle that was followed by a slowdown triggered by the U.S. credit crisis. Demand declined, leaving Tata Steel saddled with excess capacity and losses. The steelmaker was forced to sell assets in the U.K. and also agreed to merge its European business with Germany's ThyssenKrupp AG.
It’s now shifted focus back on the domestic market. The company is adding 5 million tonnes per annum at its Kalinganagar, Odisha plant in a capex plan to be completed by 2022. The steelmaker recently said it will raise $2 billion (nearly Rs 13,000 crore) to pare debt and buy stressed assets.
The two Bhushan group companies are among the first dozen accounts that the central bank had identified for resolution under the Insolvency and Bankruptcy Code. Bhushan Steel owes lenders over Rs 56,000 crore and Bhushan Power and Steel has outstanding loans of more than Rs 48,000 crore.
Tata Steel currently has 13 MTPA capacity and could get an additional 5.6 MTPA from Bhushan Steel and 2.5 MTPA from Bhushan Power & Steel. That would take it to 21.1 MTPA compared with JSW Steel’s 18 MTPA and Steel Authority of India Ltd.’s expected 21.5 MTPA in the year ended March 2019.
Going by its bids, Tata Steel will be paying an enterprise value that’s nine times the earnings before interest, tax, depreciation and amortisation of Bhushan Steel and 10.2 times the operating income of Bhushan Power & Steel, according to BloombergQuint’s calculations. That compares with the industry average of 6.5 times.
The bid is likely to leave bankers pleased with a lower haircut, brokerage Investec said in a report. “We fail to find adequate value in the transaction even with adopting different valuation methods like trading multiples, asset-based valuations and optionality on low-cost expansion.”
Location, Operational Synergies
The possible acquisition will help consolidate Tata Steel’s position in the eastern market. The company already has a 3 MTPA plant at Kalinganagar, Odisha. Both the Bhushan Group plants are also based in the eastern coastal state.
Acquisition of Essar Steel would have been better for Tata Steel rather than consolidating in the east, said Goutam Chakraborty, analyst for institutional research at Emkay Global. That would have allowed it to enter the western zone besides giving it a 10 MTPA capacity in Gujarat, he said.
Bhushan Steel makes flat products like hot- and cold-rolled coil, galvanised coil and sheet line. Bhushan Power & Steel makes flat, round and long products, including other value-added products like pig Iron, precision tubes, black and galvanised iron pipes, cable tapes, tor steel and special alloy steel.
If Tata Steel successfully bids for the Bhushan assets, it would further skew its portfolio towards flat products used by automotive and heavy machinery industries from the existing 72 percent share.
That’s at a time when long products like rails, rebars and billets will be more in demand given the government’s infrastructure thrust, said Kant.