Daily Brief India: Tata Steel Ltd, Apollo Hospitals Enterprise, Kratos Studios and more

We view Tata Steel as “Low Risk” on the LARA scale. The company has delivered outstanding results in recent years (before the current downturn in the steel industry), with significant deleveraging and strong earnings growth. This resulted in a substantial boost to its credit profile. We view favourably the company’s track record of achieving guidance, especially in terms of deleveraging. The business’ cyclical nature is offset by Tata Steel’s commitment to paying down debt, balancing growth and deleveraging.

We like Tata Steel’s size, complete vertical integration and diversified operations. The Indian operations enjoy strong domestic demand (which supports capacity expansion), and benefit from trade protectionism (a safeguard duty). We incorporate a credit uplift on account of Tata Group’s strong reputation, which partly mitigates the highly cyclical nature of Tata Steel’s commoditised steel-making business.

Our Credit Bias on Tata Steel is “Negative”. This is due to a sharp deterioration in the operating environment, especially in Europe, driven by high energy and coking coal costs. The structural weaknesses in the European business will likely weigh on the group during downturns.

The ESG Impact on Credit is “Neutral”. The metal & mining industry is exposed to regulatory and geopolitical risks. Furthermore, the nature of the industry places Tata Steel under scrutiny from environmental agencies and investors. However, the company has managed this well by making significant efforts for environmental factors. That said, there is room for improvement in the management of water, waste and toxic materials, as well as in social aspects. While there has been some controversy (most notably in the sudden change of chairman at Tata Sons in 2016, and later at Tata Steel), this was some time ago and the new chairman has since proven himself. Thus, we see Controversies as “Immaterial”.

• Apollo Hospitals Enterprise (APHS IN) recorded 19% revenue growth in Q3. The largest segment, healthcare services, which contributed 51% of total revenue, grew 10%. However, net profit dropped 33%.
• The company’s bottom line bled mainly due to high operating cost of the digital healthcare services platform, Apollo 24/7. Excluding operating cost of Apollo 24/7 EBITDA would have grown 10%.
• The company believes that it is at the peak burn rate for Apollo 24/7 operating cost this quarter and expects losses to moderate from here on.

• Kratos Studios, a Web3 gaming venture based in India, has raised about US$20 million in seed funding at a valuation of US$150 million.
• The round was led by Accel and saw participation from Prosus Ventures, Courtside Ventures, Nexus Venture Partners, and Nazara, among others.
• Kratos was built by Manish Agarwal, previously CEO of gaming company Nazara, and Ishank Gupta, a former executive at multinational firms like Belgian brewing firm Anheuser-Busch InBev.