Tata Steel’s decision to acquire Usha Martin’s one million-tonne steel business for a cash consideration of up to ₹4,700 crore would lift the company’s volume of long products by 24% and expand its product mix, analysts say.
Usha Martin’s alloy long steel products cater to higher value-added automotive and engineering segments.
Tata Steel, with an existing capacity of 29.5 million tonne has signed a definitive agreement to acquire Usha Martin’s speciality steel business through a slump sale on a going concern basis.
“Deal valuation appears reasonable. Net debt to EBITDA could rise slightly to 3.6x. Impact on valuation would not be meaningful, in our view,” wrote Jefferies analyst Bhaskar Basu in a research note.
Along with the steel unit, comes captive mines for iron ore with 2.5 million tonnes output in FY18, a thermal coal mine, which is under development and downstream assets like wire rod and bar rolling mills.
Ramping up capacity
Usha Martin was operating the plant at 60% capacity but Tata Steel can ramp up the production to 80% by de-bottlenecking, according to Jefferies, which has hold ratings on the stock.
J.P. Morgan is overweight on Tata Steel as it believes that Usha Martin’s acquisition is done at attractive valuations and removes the overhang of Bhushan Power and Steel acquisition.
Analysts are also upbeat about the deal for operational and logistical synergies. “It’s a positive for Tata given that they have a good ready-made steel asset at reasonable valuations with captive iron ore and coal mines.
The acquisition will have operational and logistics synergies as Usha Martin assets are located in Jamshedpur, near Tata Steel’s unit. The steel cycle has turned around so it’s a timely acquisition,” Paras Bothra, president, equities, Aashika Stock Broking told The Hindu.
HSBC Securities believes that Usha Martin deal is marginally positive as it will increase Tata Steel’s long product capacity to 4 million tonnes per annum.
It has put Tata Steel as the preferred stock in the ferrous space.
