Tata Steels Merger Plan To Yield Gains Over Long Term: Fitch Ratings

However, the financial gains are likely to be small and could take several quarters to be realised, depending on the pace of regulatory approvals, Fitch said in a statement.

India-based TSL announced on 22 September 2022 that its board has approved its merger with six subsidiaries and one associate, using share swaps instead of cash. The proposed merger is aimed at enhancing management efficiency and deriving synergies from centralised procurement, inventory optimisation and unified marketing. TSL estimates annual cost savings to be well over ₹8 billion, with a large contribution from lower royalty payments, according to news reports, citing its CFO, the rating agency stated.

“Based on this, we estimate TSL’s EBITDA could improve by 3-5% once the synergies are realised. TSL has been consolidating the financials of the six subsidiaries, and the associate’s debt and EBITDA are negligible compared with the TSL group," Fitch said.

The proposed transactions, however, could take several quarters to be completed. The mergers will be subject to a regulatory approval process, which includes approval by stock exchanges and the National Company Law Tribunal (NCLT). TSL’s previous merger with its subsidiary, Tata Steel BSL Limited, was completed in 4Q21 after NCLT approval, following the approval of the plan by the board in April 2019, it said.

Indian steel prices have fallen sharply since May 2022, with prices of hot-rolled coils down more than 20% in August from the average in April. The drop in domestic prices has been driven by global trends, as well as India’s imposition of a 15% export duty for several steel products since 22 May.

“We assume sharply lower standalone EBITDA margins for TSL from the financial year ending March 2023 (FY23), with an EBITDA per tonne (t) of around INR18,000 in FY23 and INR14,000 each in FY24 and FY25, compared with around INR29,000/t in FY22," the the rating agency noted.

It also said that the TSL’s total debt/EBITDA could remain lower than our positive rating sensitivity of 2.5x, despite weaker margins and a lower EBITDA, if it maintains a prudent capex policy, although the leverage would increase from the 1.2x level in FY22. This likelihood is reflected in the Positive Outlook, it added.