MUMBAI: Brokerages gave thumbs down to the recent Tata Steel Ltd’s joint venture with Germany’s ThyssenKrupp AG citing economic fallout and uncertainty in the short to mid-term. In the long run, however, analysts expect the deal to derive cost synergies both in operational and financial aspects.
Most brokerages cut the target price of Tata Steel citing concerns of a bloated balance sheet and a potential fall in economic interest in the partnership during an IPO. While Investec flagged concerns of a bloated balance sheet with the impending Bhushan Power and Steel acquisition and revised its target price down, Kotak Institutional Equities said the JV was positive for Tata’s financials as it can transfer 2.5 billion euros worth debt to the JV, especially after Bhushan Steel buyout.
Both the firms will have to hold a combined stake of at least 50 per cent for at least six years, but at the time of the IPO upon conversion of warrants, ThyssenKrupp's stake will likely increase to 55 per cent, Tata Steel said last week. However, ThyssenKrupp will solely determine the timing of the joint venture’s IPO, according to the brokerages.
“The JV is likely to derive cost synergies primarily from procurement, business enablement and other SG&A costs, while over a longer period, capex and working capital integration should help conserve cash significantly. In times of lingering surplus capacity in Europe and growing disruptions in global trade frameworks, the combined strength should enhance the sustainability of the business,” noted Anjani K Agarwal, Partner, and Global Steel Leader, Ernst & Young.
According to Investec, post-due-diligence, the band of guided synergies has been reduced by 100 million euros to 400-500 million euros compared to what the management had indicated last year.
The joint venture would make the combined entity the second largest flat steel producer in Europe with 21 million tonne deliveries, 17 billion euros in revenue and Ebitda of 1.7 billion euros.