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Tata Steel: Lingering “Debt” Weight

Tata Steel Ltd (TATA IN) (“TSL”)’s FY18 revenue improved on rising production volume in Indian operations which accounted for 46% of overall revenue in FY18 but contributed around 79% of overall EBITDA. (See FY18 financial update section). Net proceeds of INR91bn from the rights issue in March 2018, resulted in improvement in the debt-to-EBITDA multiple to 4.5x from 4.9x a year ago. We note that the ratio remains a lot higher than Moody’s median debt-to-EBITDA multiple of 5.0x for “B” ratings respectively (TSL’s senior unsecured bond ratings are: (1) S&P: BB-/stable, (2) Moody’s: Ba3/Positive, and (3) Fitch: BB/Rating Watch Evolving.

TSL was declared the successful bidder for Bhushan Steel Ltd (BHUS IN) (BSL, a capacity of 5.6mtpa) for INR352bn, and could also win the bid for Bhushan Power and Steel Limited (BPS). We expect the acquisitions to be funded mostly by debt, which could see TSL's debt-to-EBITDA multiple increase to 5.8x (See stress asset bid update section).

We reiterate our UNDERWEIGHT recommendation on the TATAIN complex on the debt overhang in support of its acquisition(s) and prefer JSW Steel Ltd (JSTL IN)'s JSTLIN complex for the Indian steel credits. We note that, in the long term, the acquisition of the stress assets will help TSL gain its market share, access to a capacity of about 9mtpa to stay competitive and benefit from the growth in domestic sectors like infrastructure, automobiles, and consumer goods.

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