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Tata Steel piles up record debt as acquisitions are back on radar

After Bhushan Steel's takeover, company's debt reaches $15 billion

Tata Steel has been aggressively circling some of distressed assets in India in a bid to beef up its domestic capacity and bridge the gap with larger rival JSW Steel.    © Reuters

MUMBAI (NewsRise) -- Tata Steel's debt has ballooned to a record as the Indian steel maker steps up acquisitions to expand capacity, raising concerns the borrowings may damp profitability.

The company's $5 billion purchase of the mills of debt-laden Bhushan Steel, which was among the largest of the 12 defaulters that India's central bank referred to bankruptcy courts for resolution last year, has spiked its net debt at the end of June by 50% to a staggering 1.03 trillion rupees ($15 billion).

Tata Steel has been aggressively circling some of these distressed assets in India in a bid to beef up its domestic capacity and bridge the gap with larger rival JSW Steel. However, analysts remain concerned about the impact of the debt on the Mumbai-based company's books.

Edelweiss Securities cut target price for Tata Steel stock to 720 rupees from 777 rupees, "taking cognizance of the spurt in net debt post the Bhushan Steel acquisition." The acquisition will be "value-accretive" in the long run, but in the near future, the higher debt levels are likely to "weigh," the brokerage warned.

Tata Steel is also in the race to acquire the stressed assets of another steel maker Bhushan Power & Steel for which it had initially placed a bid worth 170 billion rupees, according to media reports. The steel maker's initial offer was reportedly topped by JSW Steel after the close of bids, leading to lenders calling for fresh offers.

On Monday, Tata Steel said it placed a fresh bid for the asset, though it declined to comment on the value.

Some analysts are concerned that the steel maker may yet again fall into a spiraling debt trap after its ambitious, debt-funded expansion into Europe more than a decade ago fell flat. The Indian company, which entered Europe through the purchase of the U.K.'s Corus Group for 6.2 billion pounds in 2007, has been selling off parts of its European assets amid mounting losses and cut-rate price competition from Chinese rivals.

Last month, Tata Steel formed an equal joint venture with Germany's Thyssenkrupp to create Europe's largest steel maker after ArcelorMittal. The deal will allow the Indian steel maker to move roughly $3 billion of its debt into the joint venture, bringing down the cost of debt servicing substantially.

"Debt in the context of growing balance sheet and capital expenditure is very closely monitored," Tata Steel Chief Financial Officer Koushik Chatterjee told reporters at a news conference after the company reported its first-quarter earnings on Monday. "We will look at ensuring that debt is within control."

To be sure, the string of acquisitions are likely to beef up Tata Steel's operations at home, where steel prices have been surging amid rising public spending on infrastructure sector. The increased spending on infrastructure is expected to lead to a record 10% increase in domestic steel output this year, according to government estimates.

The sustained capacity constraints in China, one of the largest steel producers in the world, also augur well for global steel prices.

Tata Steel reported a two-fold jump in first quarter profit, aided by a 7.9% increase in steel deliveries in India.

Shares of Tata Steel rose 1.7% in Mumbai trading, while the benchmark S&P BSE Sensex gained 0.6%.

--Dhanya Ann Thoppil and Dipika Lalwani

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