thyssenKrupp : Tata Steel ThyssenKrupp JV delayed to December 2018 after labour unions raise concerns

ThyssenKrupp has delayed its merger with Tata Steel to December 2018 over delays in reaching labour agreements over job guarantees. Thyssenkrupp’s labour union has asked for safeguards that they would not be disadvantaged by the merger. While the deal does not require the approval of ThyssenKrupp’s labour union, it is necessary to prevent operational disruptions in the future.

ThyssenKrupp and Tata Steel had signed an agreement on September 20, 2017 to form a 50:50 Joint Venture. This newly created entity would become the second largest European steelmaker after Arcelor Mittal Europe. The management of Tata Steel expects the JV to create cost synergies of 400-600mn euros (Rs3,200-4,800cr) per annum through reduction of costs and better utilisation of downstream operations.

We feel that this delay does not endanger the deal as the economics for the merger would create an entity with better scale and would thus be more competitive than each separate entity. We also feel that while the delay in the merger may affect earnings in FY19E, it would however, not impact the earnings in FY20E.

Tata Steel Ltd (TSL) would benefit from (a) ~2% volume growth in domestic steel production supported by spending on infrastructure and (b) steel spreads to stabilise in medium term due to domestic demand. The company is expected to see revenue and EBITDA CAGR of 2.8% and 8.9% over FY18-20E respectively with an EBITDA margin of 17.7% in FY20E. EBITDA margins are also likely to expand by ~192bps owing to better utilization levels and cost rationalisation for Tata Steel Europe. The stock is currently trading at 7.1x FY20E EPS.

TSL is an international steel company with a manufacturing presence in Europe and Asia. The total steel capacity for the company stands at 27.5mn tonnes. The company is planning to upgrade the Kalinganagar plant, which would take the domestic steel capacity of TSL to ~18mn tonnes. Domestic steel production stood at 12.48mt in FY18, up 6.8% yoy. Steel production for TSL Europe stood at 10.68mt in FY18.

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