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Tata Steel emerges as highest bidder for Bhushan Steel with Rs35,000cr bid

JSW Steel is currently in the second place with a bid of Rs29,700cr.

Tata Steel Ltd (TSL) has emerged as the highest bidder for Bhushan Steel Ltd with a revised bid of Rs35,000cr. JSW Steel Ltd is currently in the second place with a bid of Rs 29,700cr, according to media reports. Initial bids for Bhushan Steel had been submitted on February 3, with Tata Steel’s first bid at ~Rs24,000cr. This is a ~45% increase from the initial bid. If this acquisition is successful it would increase the domestic steel capacity of Tata Steel by ~43% to 18.6mn tonnes per annum. The strong rise in domestic steel consumption would support the inorganic expansion by Tata Steel and the stock is likely to trade with a positive bias.

Bhushan Steel Ltd is among the 12 large corporate accounts identified by the RBI that accounted for ~25% of the exposure to bad loans for the banking sector. Bhushan Steel has an outstanding debt of Rs50,000cr, with bank dues standing at ~Rs44,000cr. Bhushan Steel is a producer of cold-rolled steel products  with a steelmaking capacity of 5.6mn tonnes per annum.

TSL is an international steel company with a manufacturing presence in Europe and Asia. The domestic operations of TSL are protected against increase in raw material prices due to backward integration. The total steel capacity of the company stood at 27.5 mtpa as on FY17. The company is planning to upgrade the capacity of the Kalinganagar plant from 3 to 8 mtpa. This would take the domestic steel capacity of TSL to ~18mtpa. The upcoming JV with Thyssen Krupp is expected to help revive the prospects for Tata Steel Europe through improved scale. The company has recently come up with a rights issue to raise up to Rs12,800cr through the issuance of up to 23.31cr shares. The proceeds of the rights issue would be used to lower the debt of the company.

We expect the company to report revenue CAGR of 5.3% over FY17-20E aided by 6.1% volume growth in domestic steel production supported by spending on construction and infrastructure. EBITDA margins are also likely to expand by ~573bps owing to better utilization for Tata Steel India. The stock is currently trading at 7.7x FY20E EPS.