Analyst Corner: Tata-Usha Martin: A small deal at reasonable valuation

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New Delhi | Published: September 25, 2018 12:22:48 AM

Tata has signed an agreement to acquire Usha Martin's steel business for a cash consideration of Rs 4,300-4,700 crore.

Analyst Corner: Tata-Usha Martin: A small deal at reasonable valuation

Tata has signed an agreement to acquire Usha Martin’s steel business for a cash consideration of Rs 4,300-4,700 crore. The deal, albeit small, would a) lift Tata’s India volumes by 6%; b) lift long volumes 24% and c) expand product mix. Deal valuation at 6-6.6x FY1E ebitda appears reasonable. Net debt to ebitda could rise slightly to 3.6x. Impact on valuation would not be meaningful, in our view. Maintain ‘hold’ given balanced risk reward. Tata has signed a definitive agreement to acquire UML’s speciality steel business through a slump sale on a going concern basis. Deal consideration will be subject to fulfillment of conditions. The deal is subject to regulatory approvals. Completion may take 6-9 months.

UML’s steel business mainly include integrated 1 mt (alloy based) steel capacity in Jamshedpur. Steel output is through the BF-DRI-EAF route. It has two small BF (245, 380 cu. m) and 3 EAF units. Iron ore is sourced from captive mines (2.5 mt output in FY18, likely lower grade). Assets includes a thermal coal mine, which is under development. Downstream assets include wire rod and bar rolling mills. UML’s alloy long steel products also cater to the higher value-add automotive/ engineering segment.

Production run rate is around 0.6 mt i.e. 60% utilisation (FY18 billets 0.62 mt/rolled product 0.58 mt), likely due to operational issues/bottlenecks. The unit could potentially ramp up 0.8 mt after some investments/de-bottlenecking, in our view. Impact on overall volumes should be small (6% volume uplift), but deal could a) lift long product volumes to 4.1mt (3.3 mt FY18) and b) build presence in value add specialty steel segment. There could be scope for some operational/ logistics synergies given assets are located in Jamshedpur.

UML standalone ebitda (steel business + wire ropes business) was `225 crore (`470 crore FY 18). We estimate steel ebitda in Q1 was `160-170 crore (based on segment financials), implying ebitda/tonne of `10,000/tonne. Based on Q1 run rate, implied deal valuation would be 6.3-6.9x. Assuming ramp up to 0.8 mt (assume `300-400 crore of investments), potential ebitda could be `760-800 crore (assumes lower spread), deal valuation at 6.1-6.6x appears within reasonable range. Tata Steel is among the largest steel producers globally with a capacity of 29.5 mt. It has operations primarily in India and in Europe.

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