Tata Steel Plans to Raise Fund For Its Expansion Projects

Tata Steel, the world’s seventh-largest steel producing company, is looking to raise funds for its expansion project in Odhisa. As per media reports, the company is in talks with various banks to raise funds to the extent of Rs 18,000-20,000 crore and is in the process of expanding its 6 MTPA greenfield plant at Kalinganagar in Odhisa in two equal phases with a total capex of Rs 34,500 crore worth of investments.

For the first phase the company has already spent Rs 3,400 crore up to March 2012, which is expected to get commissioned by 2014. The steel maker is also expanding its Jamshedpur plant capacity by 3 MTPA through brownfield expansion, thus taking the total capacity from 6.8 MTPA to 9.8 MTPA. Overall, it has a total capacity of 27 MTPA, including operations in the U.K. and the Netherlands.

Since the acquisition of Corus in 2008, the company is already reeling under huge debt pressure and now the new debt will further impact the profitability of the company. As of June 2012, Tata Steel has a total net debt of USD 9.7 billion with cash and other liquid assets of about USD 3.5 billion. In April 2012, Tata Steel issued non-convertible debentures worth Rs 1,500 crore on a private placement basis.

Moreover, the current situation, especially in the European region, is not quite conducive as the company is facing serious problems over the declining steel demand and falling steel prices. This has impacted the company’s European performance badly. And now with new debts coming into the books there will be a rise in the interest cost which will affect the company’s profitability till the time there is major revival in the European operations and a decline in the interest rates.

On the domestic front though the company has done well in the last two quarters but with the revival of the monsoon and the weakening domestic and Chinese economies there will be downward pressure on the steel prices and demand. The Chinese steel makers are facing their worst period and may lower down the steel prices further in the coming months. Any correction in the Chinese steel price will lead to cheaper imports in the country, thereby impacting the domestic steel players.

In conclusion, we believe that the outlook of the company in the coming six months may remain grim, especially with headwinds from the European region which is still finding its way to evolve from the debt crisis. After all Europe generates 52 per cent of its revenue. And with higher interest rates, higher freight cost and expected decline in the steel prices a serious scenario seems to be the case in India as well.