Pressure Eases on Tata Steel to Sell Stakes, Assets to Pare Debt

Tata Steel is no longer under pressure to sell assets to pare borrowings as it looks ahead to improving demand in Europe

April 07--MUMBAI -- Tata Steel Ltd, India's largest steel maker that has the largest debt among peers, is no longer under pressure to sell assets to pare borrowings, as it looks ahead to improving demand in the European markets and a new project nearing completion in India.

Tata Steel, with a steel capacity of over 29 million tonnes (mt), has accrued debt of Rs.70,129 crore, mainly on account of its ambitious $11.3 billion purchase of the UK's Corus Group Plc in 2007, which was heavily criticized at the time.

In the six years following the acquisition, the European market remained weak in the aftermath of the global financial crisis of 2008, forcing Tata Steel to sell some of the European units as well as some assets and equity holding in India to pare debt.

But the tide might be turning, analysts say.

"Tata Steel's debt is peaking as the European economy is recovering and there is more visibility on their new project in Odisha," Chirag Shah, director, research, at Barclays Capital, said, indicating that the company is less likely to look at asset sales to bring down debt further in the near term.

In replies to an emailed questionnaire, Tata Steel's top finance executive said that the company was continually reviewing the prospects of asset and equity sale.

"We review our portfolio for performance and fitment as part of the asset portfolio strategy and take appropriate strategic actions when required," said Koushik Chatterjee, group executive director, finance and corporate, at Tata Steel.

"In the last four years, we have taken strategic actions and raised about $2 billion from the portfolio. This is a continuous process of review," Chatterjee said, without saying which assets or stakes are likely to come up for sale next.

He also did not say if there was a target for reducing debt.

Tata Steel had a net debt of Rs.70,129 crore on a consolidated basis at the end of December, according to the company, up 26% from Rs.55,854 crore at the end of 2012-13. The company's net debt-to-equity ratio was at 1.23 at the end of September, compared with 1.55 at the end of March 2013, Bloomberg data show.

Last month, the company sold 25 acres of land in Borivali in Mumbai for Rs.1,155 crore. It also sold a 4.37% stake in group company Titan Industries Ltd to Tata Sons Ltd last year in March through its unit Kalimati Investment Co. Ltd.

"Tata Steel has about Rs.10,000 crore worth of inter-group equity holdings and non-strategic assets, which is more or less like a cushion they can use to reduce debt in case a need arises," Shah of Barclays Capital said.

Opportunistic sales likely

While the company still has the option to sell assets to pare debt, given the easing pressure, it is now more likely to make opportunistic sales, with the objective of taking the benefit of higher valuation, as the markets and the economy improve, analysts said.

"Right now, selling assets cheaply may not be a good option," said Alok Agarwal, head of research, institutional equity, Networth Stock Broking Ltd. "Tata Steel could look out for two things -- a smarter recovery in Europe and higher infrastructure spend by the new government in India which could determine how fast the cash flows come in."

To be sure, the earnings before interest, taxes, depreciation and amortization (Ebitda) at the European operations would have to double from the current levels to $70-80 a tonne for the needle to turn on the debt front, Agarwal said. Ebitda is a key indicator of a company's performance.

"They have been selling their stakes in bits and pieces for the past several quarters and stakes sales, going forward, are likely to be more opportunistic in nature," said Barclays' Shah.

Tata Steel may look to sell stakes in Tata Sponge Iron and some more stakes in Titan, other analysts said.

A stake sale in Dhamra Port in Odisha could also be on the table.

Dhamra could fetch them a good price as ports are set to be valuable as the economy picks up, Networth's Agarwal said, but Chatterjee did not comment when asked if the stake in Dhamra Port was slated next for sale.

Tata Steel's consolidated Ebitda is Rs.15,782.7 crore in 2013-14, rising to Rs.17,822.4 crore in 2014-15 and Rs.19,920 crore in the next fiscal year, a 13 March research report from Elara Capital estimated.

Elara forecast Ebitda margin at 10.7% in the year ended 31 March, rising to 11.5% in the next fiscal and 11.9% in 2015-16. Net debt-to-equity ratio was seen at 1.9 in 2013-14, improving to 1.8 in in the next year and 1.5 in 2015-16.

Shares of Tata Steel ended on BSE at Rs.401.90 on Friday, up 0.84% from Thursday's close and 32.03% more than a year ago.

The Sensex closed at 22,359.50 points, down 0.66%, and up 20.80% from a year ago. The BSE Metals index closed at 10,110.15 points, up 0.25%, and up 19.06% from a year ago.

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