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Bondcritic

Bondcritic, established in 2009, is designed to be an independent credit research voice that helps investors gain insights and unbiased analyses on Asian fixed income market. Our mission is to discover deep-value Asian high-yield and distressed bonds with a bottom-up approach, together with the help of our proprietary ESG (Environmental, Social Development, and Governance) model. At the same time, we focus on bringing investment cases of unrated and unloved issuers to the general public.

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Credit Researcher - South Asia, Bondcritic

Shrey Bhandari

Credit Researcher - South Asia

Credit

<a href="https://www.smartkarma.com/entities/20934" target="_blank" data-smartkarma-citation="entities:20934:1">Tata Steel Ltd (TATA IN)</a>’s latest quarterly results beat our expectations. The company’s revenue for Q2FY19 (which ended in September) rose 15% YoY, with EBITDA during the same period rising nearly 50% YoY. This growth reflects a good operating and market performance during the quarter. The company has also benefitted from the amalgamation of previously-acquired <a href="https://www.smartkarma.com/entities/11942" target="_blank" data-smartkarma-citation="entities:11942:1">Bhushan Steel (BHUS IN)</a> (BSL). At the same time, gross debt during Q2FY19 increased by INR20.65bn compared to the previous quarter. The total comprehensive income has declined from INR36.81bn in Q1FY19 to INR13.05bn during Q2FY19. The company has seen a c.13% decline in its share price between 15-November-2018 and 07-December-2018 due to falling steel prices in China as well as slowing demand in the Indian market.
On the M&amp;A front, in June 2018, the company announced a definitive agreement with <a href="https://www.smartkarma.com/entities/21729" target="_blank" data-smartkarma-citation="entities:21729:1">ThyssenKrupp AG (TKA GR)</a> to combine their respective European steel businesses into a 50-50 joint venture. The European Commission has announced that it is already in the second phase of reviewing the possible transaction and an update is expected by the turn of the year. Tata Steel also announced the acquisition of the steel business of <a href="https://www.smartkarma.com/entities/11178" target="_blank" data-smartkarma-citation="entities:11178:1">Usha Martin Ltd (USM IN)</a>. The acquisition forms part of Tata Steel’s strategy to acquire distressed steel assets, primarily in India. Such M&amp;A activity will help the company in building production.
The Tata Steel complex is rated BB- by S&amp;P and Ba3 by Moody’s. While there has been no recent update to the ratings, Moody’s has stated that the acquisition of Usha Martin’s steel business will be credit positive for Tata Steel but the agency also expects the overall operating environment for Tata Steel to deteriorate over the coming months due to the softening of demand from the Indian market. We believe that the operating environment for the company will remain tough, especially in the Indian and Chinese markets.
We reiterate our UNDERWEIGHT recommendation on the TATAIN complex due to its lingering debt. We price the TATAIN complex on top of India's quasi-sovereign bonds. We believe that TATAIN should trade 150bps above its peers but the difference remains less than 100bps. Also, the completion of the acquisition of BSL added to the company’s capacity, Tata Steel had to raise a further INR165bn in debt, adding to its already leveraged balance sheet. Further acquisitions are only likely to add to the net debt of the company.

Tata Steel Ltd (TATA IN)’s latest quarterly results beat our expectations. The company’s revenue for Q2FY19 (which ended in September) rose 15% YoY, with EBITDA during the same period rising nearly 50% YoY. This growth reflects a good operating and market performance during the quarter. The company has also benefitted from the amalgamation of previously-acquired Bhushan Steel (BHUS IN) (BSL). At the same time, gross debt during Q2FY19 increased by INR20.65bn compared to the previous quarter. The total comprehensive income has declined from INR36.81bn in Q1FY19 to INR13.05bn during Q2FY19. The company has seen a c.13% decline in its share price between 15-November-2018 and 07-December-2018 due to falling steel prices in China as well as slowing demand in the Indian market.
On the M&amp;A front, in June 2018, the company announced a definitive agreement with ThyssenKrupp AG (TKA GR) to combine their respective European steel businesses into a 50-50 joint venture. The European Commission has announced that it is already in the second phase of reviewing the possible transaction and an update is expected by the turn of the year. Tata Steel also announced the acquisition of the steel business of Usha Martin Ltd (USM IN). The acquisition forms part of Tata Steel’s strategy to acquire distressed steel assets, primarily in India. Such M&amp;A activity will help the company in building production.
The Tata Steel complex is rated BB- by S&amp;P and Ba3 by Moody’s. While there has been no recent update to the ratings, Moody’s has stated that the acquisition of Usha Martin’s steel business will be credit positive for Tata Steel but the agency also expects the overall operating environment for Tata Steel to deteriorate over the coming months due to the softening of demand from the Indian market. We believe that the operating environment for the company will remain tough, especially in the Indian and Chinese markets.
We reiterate our UNDERWEIGHT recommendation on the TATAIN complex due to its lingering debt. We price the TATAIN complex on top of India's quasi-sovereign bonds. We believe that TATAIN should trade 150bps above its peers but the difference remains less than 100bps. Also, the completion of the acquisition of BSL added to the company’s capacity, Tata Steel had to raise a further INR165bn in debt, adding to its already leveraged balance sheet. Further acquisitions are only likely to add to the net debt of the company.

Tata Steel: Improved Results, Debt Worries Remain