Tata Steel Ltd will use the $1.12 billion (Rs.5,030 crore) it earned from the sale of its 26.3% stake in Australia’s Riversdale Mining Ltd to fund the expansion of its steel-making capacity in Jamshedpur and Kalinganagar, as well as mining operations and capital expenditure in its European operations.
The world’s seventh largest producer of steel, which has $3 billion in cash after the stake sale, expects to expand annual domestic capacity to 16 million tonnes (mt) by 2016, managing director H.M. Nerurkar said in an interview.
Tata Steel makes 6.8 mt at its Jamshedpur plant in Jharkhand, but is in the process of expanding capacity by 2.9 mt by the fourth quarter of the current fiscal year. It has also begun work on a 6 mt greenfield plant in Orissa’s Kalinganagar.
“Orissa should complete its first phase of 3 mt in FY14, and in another year and a half after that, we should complete the next phase. So by FY16, we should be a 16 million tonne company in India,” Nerurkar said, adding that the company expected to have a domestic capacity of 30 mt by 2020.
Explaining the recent sale of its stake in Sydney-based Riversdale to the Rio Tinto Group—☼the world’s second largest miner—Tata Steel’s chief financial officer, Koushik Chatterjee, said the steel maker had built its stake over three years.
“We said as part of a listed entity, so long as you have the equity, it will be valuable; which it has been. It’s created significant value over the past three years,” Chatterjee said.
He said Tata Steel’s initial decision to stay invested in Riversdale was because Rio’s bid had started as a 51% takeover bid, but once the latter decided to de-list the target company, the former decided it didn’t want to be present in two unlisted entities, especially since it was getting fair value for its stake.
Apart from holding a 26.3% stake in the parent, Riversdale, Tata Steel holds a 35% stake in its Benga coal project in Mozambique, as well as a 40% off-take agreement for the coking coal at relevant market prices in which it has still stayed invested. The Benga project will produce 1.5-2 million tonne per annum (mtpa) of coking coal, which is expected to go up to 3-4 mtpa by 2014.
Chatterjee said Tata Steel had not anticipated to exit the miner in the manner it did, but its hands were forced. “You can never factor in when you invest. We’re not traders, we’re strategic investors. So, unless there are circumstances when it makes better sense to exit, we would not necessarily want to exit,” he said.
Tata Steel, which was named in Fortune magazine’s 2011 list of most admired companies for the third consecutive year, has been criticized by environmentalists and social activists in recent years.
It faced flak for its participation in building a port off Orissa’s coast in Dhamra, along with engineering company Larsen and Toubro Ltd, with environment activists claiming it threatened nearby protected areas and endangered species such as the Olive Ridley turtles.
In January 2006, police fired at tribals protesting the construction of a boundary wall by Tata Steel at Kalinganagar. The protest was called because tribals said they were not being compensated adequately for construction projects by large industrial houses on land they have traditionally occupied.
Nerurkar said the nation and the industry could do more to carry along the aspirations of the local population. Since the tragic incident though, the company has better understood local aspirations and has been more successful in engaging the local community, he said.
“Just because we were used to a particular model in Jamshedpur, in our mines, in our collieries, that’s not always going to be the success model (everywhere),” he said.
Speaking on the company’s debt position, Chatterjee said that after the inflow of over a billion dollars from the stake sale, net debt had dropped to $9.5 billion, which gave the company the option of either forcefully pre-paying some of its debt that is not due until later, or using the extra capital to grow the business, which will in turn generate more earnings before interest, tax, debt and amortization (Ebitda)—a measure of operating profitability.
“It’s a good choice to have and, therefore, it’s important to steer and manoeuvre the debt accordingly,” he said.
Nomura’s Alok Kumar Nemani, who last week cut the target price of three Indian steel makers, including Tata Steel, due to the risk of the uncertain economic environment, expects the company to generate $4.5 billion in Ebitda in fiscal year 2012-13 due to the Jamshedpur expansion.
“This along with stable working capital and flat capex will result in cash flows increasing by close to $1.1 billion, on our numbers. Therefore, we expect earnings to improve by 33% in FY13 and operating cash flow to reach Rs.13,300 crore in FY13 compared with Rs.5,600 crore in FY11,” Nemani wrote, adding that this would enable the company to reduce debt by close to $500 million a year despite planned capex of $2.2 billion.
Chatterjee also said at least half the capital needed for the Kalinganagar project would be funded by internal cash flows from the company’s domestic operations, enabled by annual Ebitda generation of $3.5-4 billion, with the balance coming from external borrowing.
“We will keep funding with a bias towards internal generation, we will keep maintaining our capital structure targets which is net debt to Ebitda of 2.5 times and debt to equity of 1 to 1.25 or maybe 1.5 in a particular year when more capital is needed,” he said.
JPMorgan’s Pinakin Parekh in a recent note estimated that implying a cost of $1,300 a tonne, the 6 MT Kalinganagar project would cost the company $7.8 billion to build.
Brokerage India Infoline also expects the company’s debt to remain at current levels and debt leverage to approach one time equity as cash flows would be sufficient to meet capex requirements.
Tata Steel executives did not offer details of planned capital expenditure in Europe.
Source:- http://www.livemint.com/2011/06/27022756/Tata-Steel-to-use-Riversdale-c.html?atype=tp
Thanks
Ankit Wani
Intern @ DENIP Consultants Pvt. Ltd.
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