Concern over short-term and optimistic in the longer runTHE historic acquisition of Tata Steel by Corus could be a tad expensive and this is bound to impact the company’s balance sheet. At least, that’s the consensus among steel sector analysts and experts. While all are unanimous in their appreciation of the visionary move, they reckon that in the next few years, earnings visibility in Tata Steel books would be a difficult issue. “The deal size at $11 billion will put pressure on the consolidated financials of the company for the next couple of years,” Hitesh Agrawal, senior research analyst with Angel Broking, said. The reason being the enterprise value (EV) paid for Corus is nine times its EBITDA, considered to be on the higher side.The average EV multiples in steel sector acquisitions the past two years have been around six times. Tata’s original bid was on theses lines. Mittal’s offer for Arcelor was 4.46 times earnings. Mittal Steel finally paid 4.6 times Arcelor’s historic EBITDA.The management justifies its stance of getting a steel capacity of around 20 million tonnes at a capital cost of $700 a tonne. “The Tata Steel greenfield projects in India are valued at around $900 a tonne,” says Prasad, steel sector analyst with Anand Rathi Securities. The international capital cost norm works out to around $1,100 a tonne, for integrated plants.However, in case of the Corus takeover, these numbers don’t match up. A Macquarie Research report had earlier valued Corus’ capacities at $480 a tonne. This is because of the 20 million steel capacity only around 6.5 million is integrated and the rest consists of downstream capacities. The fair value for Macquarie Research’s analyses is arrived at considering a value of around $650 per tonne for its operational plants (some are old and unproductive) and $400 per tonne for the rest. Other global research houses like DSP Merrill Lynch had pegged similar valuations.Then there is the steel cycle to reckon with. According to Agarwal, “Considering the impending reversal of the steel cycle in FY 2008, the Tata Steel stock could remain under pressure.” But the longer term perspective looks bright. “The stock is not a yearly play anymore. It’s for long term investors — those who believe that Indian demand is set to grow in the coming years,” Prasad said.This is in line with Tata’s thinking as well. He reckons there will be years when the growth numbers will not match up and the market beating down the stock has been rather harsh. Overall, the market seems to have re-rated the stock based on the new acquisition details.The consensus is that the stock will get re-rated once the synergies start getting visible, estimated to be around three years from now.
