 "Tata Steel says no investment proposal sent to Electrosteel Steels")
On Thursday, in a disclosure to the stock exchanges, Electrosteel Steels said lenders and the company had received indicative term sheets for investment from the Tata Group and a financial investor based in Singapore.
Tata Steel, however, denied sending term sheets to Electrosteel Steels indicating investment. “We have not spoken to Electrosteel Steels and have not given any term sheets to them,” Koushik Chatterjee, executive director and group chief financial officer at Tata Steel, told Business Standard. “Tata Steel, therefore, is not obliged to make any filing to the exchange,” Chatterjee clarified.
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The West Bengal-headquartered Electrosteel Steels is a subsidiary of Electrosteel Castings, which holds a 45.23 per cent stake. With a 2.5 million tonne Chinese steel facility in Jharkhand, Electrosteel Steels had net debt of close to Rs 10,000 crore on March 31, 2014.
The company has also been allotted an iron ore mine that is awaiting clearance from the Jharkhand government.
The company has not been performing well for the last five years. Its debt-equity ratio has risen to 4.72 in 2013-14 from 1.76 in 2010-11.
“It is like taking a debt of Rs 10,000 crore on the books for a capacity which is just about 2.5 million tonnes. Even if Tata Steel gets access to the iron ore mine of Electrosteel Steels, it can very well use its existing raw material resources,” said an analyst with a local brokerage.
Tata Steel is coming up with a 3 million tonne plant at Kalinganagar in Odisha and also has plans for another 3 million tonne capacity in the state.
As steel prices are weak due to subdued demand, deleveraging for the Tata Group company is likely to be slow as earnings will remain under pressure. In such a scenario, acquiring a heavily-indebted company did not make much sense, said some analysts.
In 2014-15, Electrosteel Steels reported a loss at the operating level because expenses were 10 per cent higher than net sales of Rs 1,831 crore.
The company's net sales in 2014-15 increased more than three times, but were unable to beat high expenses, a situation similar to 2013-14.
Electrosteel Steels’ finance cost was more than double at Rs 451 crore, year on year in 2014-15. Due to this, its loss widened to Rs 624 crore in 2014-15 from Rs 291 crore in 2013-14.
“Tata Steel will save time if it acquires a readymade plant, else it typically takes four years for a 2 million tonne plant to be set up,” said an analyst with a foreign brokerage.
Electrosteel Steels had set up the facility for about Rs 9,000 crore, lower than the industry average cost of Rs 12,000 crore. “Since the company is debt-laden and the facility built at lower-than-industry average, Tata Steel stands a good chance to buy the asset at no premium,” said the analyst with foreign brokerage.
“Even if Tata Steel has captive iron ore mines, access to additional captive resources would anytime be advantageous for a company dealing in the commodities business,” the analyst added.
Some analysts said a debt-ridden facility should be acquired at any price less than Rs 10,000 crore, while others felt it should be priced Rs 10,0000-12,0000 crore.
Last month the stock exchange had sought clarification from Tata Steel on a news report that said the company was in talks with Electrosteel Steels for a buyout. The alloy producer had then responded it regularly evaluated organic and inorganic growth opportunities across various segments of its operations.
“The board and management of Tata Steel is committed to making disclosures at the appropriate time so as to eliminate any asymmetry of information. The company has robust disclosure principles and follows a policy of not commenting on market speculation,” it had said in a notification to the stock exchange.