Tata Steel is likely to put in Rs 300-400 crore in FY20 into Usha Martin's specialty steel division that it has agreed to acquire, to further improve the operating margins, a report said.
In one of the largest debt resolution case outside the NCLT, the Usha Martin (USL) board had on September 22 signed an agreement with Tata Steel (TSL) to sell the Kolkata-based firm's steel and wire rope business for a cash consideration of up to Rs 4,300-4,700 crore in a slump sale.
USL's Jamshedpur-based steel division has one million tonnes per annum (mtpa) of alloy-based manufacturing capacity in the long products segment.
"TSL will help in improving the blended EBITDA/tonne (operating margins per tonne) of the acquired business to Rs 8,000 per tonne by FY21, from the current Rs 6,800 per tonne on the back of captive coal supplies, optimisation of sales mix and other operational synergies," India Ratings said in a report.
It expects the acquired division to contribute a modest 3.5 percent to TSL's absolute EBITDA in FY20 for domestic business.
The rating agency also assumes TSL to incur an additional Rs 300-400 crore of capex in FY20 to further improve the division's EBITDA/tonne.
The agency expects total cash outflows on account of capital expenditure and acquisitions to remain below Rs 9,000 crore in FY19, with a large portion of the acquisition outflows to occur only in FY20.
India Ratings said that the acquisition is credit neutral for TSL, adding that proposed acquisition will lead to a modest increase in TSL's net leverage to about 4.0x in FY20, against 3.3x in FY18.
It can be noted that global rating agencies S&P and Moody's on September 25 had said the purchase is credit positive for TSL as it widens its product portfolio to the high margin long products segments, where the Tatas are not strong now, without impacting the company's financial profile or leverage as the deal will be an all-cash one.
India Ratings also said the proposed acquisition appears to be a good strategic fit to TSL, aligning well with its existing location and vicinity of captive iron ore mines. The iron ore and coal mines are adjacent to TSL's existing projects, located primarily in eastern India.
It will increase TSL's India capacity to 19.3 mtpa, from 18.3 mtpa, making it the largest steel company by domestic production.
It expects revenue contribution from TSL's long product division to increase to about 22 percent by FY20, compared with 18 percent in FY18, of the domestic sales in the near-to-medium term.
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