Mumbai (Maharashtra) [India], September 27 : The amalgamation of seven business units of Tata Group with Tata Steel will help reduce costs and won't have any material impact on the company's credit profile, CreditSights, part of the rating agency Fitch, said in a report on Tuesday.
We do not anticipate the amalgamation to have a material impact on Tata's credit profile. Of the seven amalgamated entities, all but TRF's financials are already consolidated into Tata's, since they are its majority-owned subsidiaries, CreditSights said in a report.
Seeing that TRF's EBITDA is relatively miniscule (FY22: INR 0.13 bn vs. Tata's INR 651 bn), we expect Tata's EBITDA to remain unchanged post TRF's consolidation (assuming Tata's stake exceeds 50 per cent). Also, the payment consideration for the major amalgamations is equity through share swaps (only ISWIP involves a cash payment of Rs 127 million, which is immaterial) and is not additional debt or cash payments. Thus, we expect Tata's pro-forma net leverage to remain unchanged post-transaction (end-FY22: 0.9x), the rating agency said.
The Board of Directors of Tata Steel at its meeting held on September 22, 2022 approved amalgamation of seven business units.
The units that will be merged with Tata Steel include Tata Steel Long Products Limited, Tinplate Company of India Limited, Tata Metaliks Limited, TRF Limited, The Indian Steel & Wire Products Limited, Tata Steel Mining Limited, and S & T Mining Company Limited.
We view the proposed amalgamation as another positive step taken by Tata to simplify its extensive corporate structure. The company has been streamlining its corporate structure since 2019, and has reduced 116 associated entities to date. In turn, we expect the amalgamation to drive sharper management oversight and a more cohesive group strategic direction, CreditSights said.
We also anticipate Tata to leverage a more vertically integrated structure, as the deal would place key downstream units TSLP, TCIL and TML under Tata, while retaining full control over its upstream mining units, TSML and STML. While the amalgamation constitutes a related party transaction, Tata affirmed that due process was followed to arrive at the fair valuation of the target companies and that the consideration was determined on an arm's length basis, it said.
Management estimates Tata to enjoy Rs 10-15 billion of synergies annually from the deal, which we think largely relates to cost savings. Management shared that only coking coal is procured centrally while other raw materials are procured at the individual business units. Thus, the amalgamation would likely allow for pooled sourcing of raw materials, which could lower group procurement costs, the ratings agency said.
We also expect Tata to derive some synergies across its sales and marketing functions. Set against a backdrop of global slowdown concerns and falling steel prices, we see this deal as a form of prudent financial cost management by the company, it said.