Fitch Says Tata Steel’s Leverage Will Eat Into Its European Gains

Tata Steel Ltd.’s business profile could improve as a result of its joint venture with Germany’s Thyssenkrupp AG in Europe. Yet, these gains could be offset by high levels of borrowing.

That’s according to a recent report by Fitch Ratings. The potential reduction in structural weaknesses for the Indian steelmaker across Europe could be offset by a relatively high level of leverage over the next two to three years due to acquisitions in India to expand market share, the ratings agency said in an note.

Tata Steel and Thyssenkrupp finalised the deal last month in which the companies will hold equal share for at least six years. The resultant unit will be the second-largest European flat-steel producer with annual shipment capacity of about 2.1 crore tonnes.

Under the deal, Tata Steel will transfer about 2.5 billion euros of debt while Thyssenkrupp will add pension liabilities of 3.6 billion euros to the joint venture. The structure is “self-sustaining” with debt restricted to less than twice the Ebitda of the two companies in the last twelve months, Fitch said.

Leverage still remains a concern for Tata Steel. The steelmaker is trying to regain the top spot in India through the acquisitions route. That also means more debt. Fitch said that the recent acquisition of Bhushan Steel Ltd. will increase its debt by about Rs 35,000 crore. And if it also gets Bhushan Power and Steel Ltd., it could increase it by 50 percent.

Fitch noted that the total adjusted debt-to-Ebitdar will remain above 4 over the next three years. That doesn't bode well for its ratings. “This is significantly higher than the level of around 2.5x for a 'BB' category rating in general, as per Fitch's Steel Rating Navigator,” the note said.

Fitch estimates that operating profit for Tata Steel’s India operations (excluding acquisitions) was pegged, that are currently estimated at Rs 13,000 per tonne for fiscal 2019, could drop slightly to around Rs 12,500 annually thereafter. They also expect a capital expenditure of up to Rs 10,000 crore over the next three years.