Will Tata Steel prioritise paring debt or inorganic growth?

Tata Steel’s acquisition of Bhushan Steel was among the first IBC cases to step into the light at the end of the resolution tunnel. The takeover, which was completed in May, has already started to create synergies, according to Tata Steel.

One of India’s largest steel companies, Tata Steel has also put in a bid for Bhushan Power and Steel.

While announcing its results for the quarter ended June on Monday, the company said the group’s liquidity position is robust with approximately Rs 24,984 crore in cash and cash equivalents.

The board also approved issue of debt securities of up to Rs 12,000 crore in the form of non-convertible debentures and the funds raised will be deployed towards capex and debt repayment, the company said in a statement.

It seems like the company is well-placed to continue its current pace of inorganic expansion; but does it want to?

Taking on Bhushan Steel’s debt has also caused a sharp jump in Tata Steel’s debt to over Rs 1 lakh crore. The question now is whether the company will use most of the cash it is sitting on for further expansion or debt repayment.

Analysts are of the view that the increase in debt due to acquisitions under the IBC is one of the major concerns among investors. However, they say the risks may pay off in the long run in light of strong domestic growth prospects.

Brokerage firm Prabhudas Lilladher in a note said: “Street is overly cautious on [Tata Steel’s] aggressive inorganic growth plans loading its balance sheet with high debt.” It added that the company may acquire Bhushan Power and Steel as well. It went on to say that although another acquisition will load considerable debt on the balance sheet, strong domestic fundamentals and ample growth options will drive steady returns.

Edelweiss in a note said it sees the Bhushan Steel acquisition as value accretive in the long run but it added that the higher net debt will weigh on the stock in the short run. “We continue to see value in the long run as Tata Steel focuses on profitable domestic operations. Deconsolidation of Tata Steel Europe is expected to bring relief to the currently burgeoning net debt,” the note added.

Given the robust outlook for the domestic steel industry with the government’s focus on ramping up infrastructure projects especially in the runup to the general elections, it may be the right time for Tata Steel to take on some more debt in the short term for a bigger payoff in the long term.

Sanjiv Bhasin of IIFL is of the view that Tata Steel is a global player with a clear vision of the strong commodity cycle and hence will seize any acquisition opportunity if they see synergies. "Increase in debt will be an overhang, but debt will be met expansion," he said adding that U.S. President Trump's protectionist moves are driving commodity prices up.

However, an analyst who wished to remain anonymous said, “I think they will use most of the money in hand to repay their debt. They haven’t given any indication yet about being interested to pick up more assets under the IBC or otherwise.”

When asked about further acquisitions under IBC, Koushik Chatterjee, executive director and CFO of Tata Steel said the company will take a call depending on what kind of targets it has in the future.

It remains to be seen if Tata Steel is willing to shift to top gear when it comes to inorganic growth or will take a step back after the Bhushan Steel takeover to pare its rising debt.

Tata Steel’s stock rose in trade on the BSE on Tuesday, touching an intraday high of Rs 587 per share before closing at Rs 578.9, up nearly 2% from the previous day’s close.

It reported a net profit of Rs 1,934 crore for the quarter ended June, more than double the figure it reported for the comparable quarter in the last year.