Riversdale cash to fuel Tata Steel expansion

Selling its stake in Riversdale Mining for over a billion dollars could not have come at a more appropriate time for Tata Steel.

With ambitious capex plans for its brownfield expansion and greenfield projects in Jamshedpur and Orissa, respectively, and a high leverage on its consolidated books, the cash will improve the manoeuvrability of Tata Steel. And, at a time when cost of capital is going up in India in an inflationary environment, staying in cash is a preferred option for most in India Inc. “The board will decide on the deployment of the capital. The proceeds will go to the combined pool of cash, and this will enhance our flexibility of choices. We can use it for our capex or to restructure the capital structure. As on March-end, we had $1.9 billion of liquidity, $10.4 billion of net debt. We do not have any immediate repayment obligation. But now, the overall liquidity will go up by another billion. So, our options will get enhanced substantially,” said Tata Steel’s chief financial officer, Koushik Chatterjee.

The capex will be substantial for Tata Steel’s India project pipeline. It plans to add 3 mt extra capacity at its Jamshedpur facility and set up a 6-mtpa plant in Orissa at an investment of Rs 50,000 crore in six years. It has already raised Rs 10,000 crore from a consortia of Indian lenders, led by State Bank of India, but indicated that its actual drawdown of that debt would be less, as cash flows have improved. It is estimated that the final drawdown will be Rs 6,000 crore and the rest of the requirement will be funded by equity and internal accruals. At the time of the follow-on public offer (FPO), Chatterjee had said the intent of the FPO was not to raise any more debt.

For Tata Steel’s European and international mining operations, around £400 million of capex has been lined up for the next four years, mainly for restructuring of the long products portfolio. Tata Steel is already scouting for avenues to raise cash and at the same time deleverage its balance sheet. It raised Rs 3,700 crore through the FPO.

In March, it raised another Rs 1,500 crore by issuing hybrid perpetual bonds, with interest payments going forever till the company decides to exercise the call options.

Tata Steel has also been selling its non-core businesses and restructuring existing operations through product enhancements, debottlenecking and cost rejigs under the “Fit For Future” programme. It sold a part of the Teesside Cast Products (TCP) plant to SSI for $469 million, shut down the Living Solutions business in Wales, and decided to mothball some facilities at Scunthorpe and TCP.

“Tata Steel has been focussing on the strategy of unlocking value from non-core assets. In the recent past, it sold its TCP plant in North England for $469 million and its 51 per cent stake (of 77.46 per cent) in Tata Refractories to a strategic partner for $129 million,” said Pradeep Mahtani and Raashi Chopra of Citigroup in their recent report.

In July 2010, Tata Steel sold off its entire 27.03 per cent stake in Southern Steel Berhad, Malaysia, for $72 million (around Rs 337 crore), a profit of nearly Rs 250 crore. Analysts agree even though a billion dollars may not seem large in the overall ambitious plans, any extra cash would be beneficial. Pinankin Parekh of JP Morgan said: “The $1.1-billion cash inflow is a strong positive for the balance sheet, in our view, given the investor concerns about Tata’s capex plans in Orissa. Net debt, which stood at $10.5 billion as on March-end, would decrease to $9.5 billion after the stake divestment.”

The company’s net debt to equity for 2010-11 stood at 1.3:1. It could come down to 1.17:1 when this money comes in. However, its net debt to Ebitda (earnings before interest, taxes, depreciation, and amortization) is at 3.5 times, raising the red flag for its investors.

Tata Steel raised $8.8 billion in 2010-11 and paid debt of $7.6 billion, increasing its debt by over a billion dollars in the last financial year. Analysts believe by getting this cash from the sale of its Riversdale stake, the company can lower its high-cost debt to $9.5 billion. Pritesh Vinay and Natasha Parchani of Goldman Sachs highlighted the cash would reduce the net debt, which can then be deployed to fund various growth plans. At the same time, despite the divestment, Tata Steel’s feedstock requirement will not suffer.

“Tata Steel will continue to own a 35 per cent stake in its joint venture with Riversdale Mining for the Benga coking coal project in Mozambique, due to commence operations by the end of the 2011 calendar year – with an offtake right for 40 per cent of the output from this project. Benga has coal resources of 4 billion tonnes and reserves of 502 million tonnes,” they said.