Tata Steel inks 5-yr pact to supply steel to Usha Martin

This agreement is being viewed as part of the transaction that would take place while Tata Steel will complete the acquisition in six-eight months.

Tata Steel inks 5-yr pact to supply steel to Usha Martin - Rajeev Jhawar

Soon after signing a deal for taking over Usha Martin’s steel business for Rs 4,300-4,700 crore, Tata Steel has signed a five-year agreement to supply steel to Usha Martin’s wire rope business at market-driven prices.

This agreement is being viewed as part of the transaction that would take place while Tata Steel will complete the acquisition in six-eight months.

Rajeev Jhawar, Usha Martin’s managing director, told FE that Tata Steel has signed the agreement to supply 1,60,00 tonne per annum and we will take it at a market-driven price. “Our steel division has always supplied steel to our wire rope business at market-driven prices and so sourcing it from the Tatas won’t affect our cost of wire rope production,” Jhawar said.

Although the steel will mainly go to Usha Martin’s Ranchi, Hoshairpur and Bangkok facilities, the operations in Europe and the UAE won’t consume Tata Steel’s steel. “Wherever it goes, the agreement has been to supply 1,60,000 tonne per annum”, Jhawar said.

Usha Martin’s steel production had edge over others in terms of pricing since it had own captive coal and iron ore mines. As part of the takeover deal, these mines will go to Tata Steel and Tatas would get the same advantage in pricing as Usha Martin got.

Tata Steel will also absorb all the workers of Usha Martin’s steel business, while the transaction amount will go to an escrow account of State Bank of India. More than 80% of the amount will go in repaying bank debts without any hair cut. Usha Martin has a debt exposure of `3,700 crore, a company official said.

However, the agreement, which is seen as part of the transaction, would help Usha Martin run its wire rope operation seamlessly. Usha Martin will also use part of the proceeds to fund its wire rope business.

Basant Jhawar and his son Prasant Jhawar, who holds 25% in the business, in a written statement said there was lack of transparency regarding utilisation of the proceeds and that the board of directors should make it clear.

“How much of term loan, working capital, liabilities to unsecured credits and other liabilities will be cleared and how much will be carried forward with burden falling on residual business is very much opaque.

No details are available creating doubt over transparency and management accountability,” the statement said. However, it added that the takeover deal will add value to shareholders.

Usha Martin’s wire rope production was at 47,766 million tonne during the first quarter of this fiscal and EBIDTA margins increased considerably, contributing to the consolidated EBIDTA growth of 94%.

With rising oil prices, prices of wire rope across the globe are also increasing. Wire ropes are used in oil and offshore drilling, mining, crane, elevators, rope-ways and bridges.