Tata Steel's FY09 annual report: A peek - III - Views on News from Equitymaster

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Tata Steel's FY09 annual report: A peek - III

Sep 2, 2009

In the last article, we had reviewed Tata Steel's raw material security and expansion projects going forward. In this article, we will discuss the debt position and change in debt covenants and the strategy of the company. Debt position: Tata Steel's consolidated gross debt stood at around US$ 11.8 bn as at the end of FY09 as compared to US$ 10.5 bn in FY08. The increase in debt was mainly on account of new loans worth around US$ 2.1 bn raised at Tata Steel India to fund the expansion project therein and also to maintain an adequate liquidity buffer during the global credit crisis. However, the company also repaid a debt of around US$ 1.7 bn which also includes a prepayment of debt of around US$ 215 m at Tata Steel Europe during the fiscal.

While the company had entirely hedged its foreign currency term debt in Tata Steel India in rupees that safeguarded it against the volatile movement of the rupee, Convertible Bonds (CARS) were the only instruments which were unhedged during the fiscal. Hence, on one side the gross debt showed an increase of US$830 on account of revaluation due to currency movements while on the other side, corresponding value of the hedges taken to cover foreign currency loans amounted to approximately US$611 m which was reflected on asset side of balance sheet. If one were to take into account the cash and cash equivalents of Tata Steel at the end of the fiscal, then the net consolidated debt stood at US$ 9.9 bn.

Change in debt covenants: Senior facility debt in Europe is a non recourse debt to Tata Steel, which carries certain covenants that are examined on a quarterly basis. While Tata Steel Europe met all its covenants obligations in FY09 as its operational performance remained strong. However, with the recession in Europe, the company could witness an adverse impact on its margins, consequently putting stress on covenant package in coming quarters. Hence, Tata Steel successfully negotiated the resetting of covenant package with its lenders. The company had not sought any additional funding as it had sufficient liquidity for its operations and also not re-scheduled its servicing obligations. On the contrary, it volunteered to prepay 200 m (approx Rs 16 bn) of the non-recourse debt in order to continue to de-leverage its European operations. Apart from the reset of covenant package, the lenders also agreed not to increase the interest costs for the remaining life of the loan. However, Tata Steel India, the parent company will have to inject 425 m (approx Rs 34 bn) into Tata Steel Europe in a phased manner.

Strategy: In 2008, Tata Steel launched a new vision with an aim to create a global benchmark in value creation and corporate citizenship. With respect to value creation, the company has set a target of increasing the return on invested capital on its existing assets to 30% by FY13 and to generate selective growth. For this, the company has developed a twofold strategy.

Firstly, the company will pursue the optimization of its European assets, restructure low profitability assets and continue to drive benefits through continuous improvement and synergies across the Tata Steel Group. All this put together is poised to increase the quality of earnings of its existing assets.

Second, the Tata Steel Group will pursue capacity expansion at the Indian operations and secure access to raw materials by investing in it as and when opportunity arises, thus enabling the company to generate selective growth.

Apart from this, the company continues to implement its long term strategy and planning for developing new markets. In fact, the company is focused on developing a greenfield expansion in Vietnam and optimizing operations in both NatSteel and Tata Steel Thailand in order to capitalize on the growing opportunities in South East Asian markets.

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