Mumbai, Jan. 31: Ratan Tata and his A-Team remained upbeat on the Corus deal despite the hammering of the Tata Steel scrip on the bourses and grim prognostications on the company by analysts.

Notwithstanding concerns of having paid too much for the Anglo-Dutch steel maker, the Tatas firmly believe that the benefit of synergies from the acquisition will flow from the first year itself and it will be fully evident in the third year.

This was the assertion Ratan Tata, who heads the Tata group, and B. Muthuraman, managing director of Tata Steel, made to newspersons hours after clinching the landmark deal.

The bourses started hammering the Tata Steel scrip as soon as it commenced business for the day. The stock opened lower at Rs 510 against the previous close of Rs 519.30 and did not get any respite throughout the day as the market did not agree with the jubilant management of the company.

It was a continuous downhill for the scrip since then, which finally plunged almost 11 per cent to close at Rs 463.95 after hitting the day’s low at Rs 461.10.

Harsh bourse verdict

Averring that the stock markets gave a “harsh” and “short-term” reaction, when it pounded the shares on concerns that the consideration could stretch its balance sheet, Tata asserted that the Corus takeover cost would prove to be worthwhile, though the group paid much higher than what it had started with.

In sharp contrast, the London bourses celebrated the high price that Corus fetched. At last glance, the stock was trading at 601.50 pence, up almost 7 per cent from previous close of 563 pence.

Justifying the decision, Tata said that following the acquisition, Tata Steel will now have a global scale and a footprint in Europe. “It would have taken several years for us to build a 19 million-tonne capacity,” he added.

“This will prove to be a visionary move... When we launched the bid for Corus, many thought it was an audacious move, because an Indian company taking over an European company much larger in size has not happened before,” Tata said.

Muthuraman, who along with Tata monitored the Corus auction as it unfolded last night, added that the acquisition would lead to significant synergies and it would begin to flow after the first year. “It will take some time. It will be seen in the first year and will increase further in the second year. By the third year, we will realise the full potential,” he said.

The Tata Steel managing director revealed that synergies will help the combined entity to save $350 million a year.

Cost gains

The plan is to bring in substantial cost advantages by supplying semi-finished products instead of expensive iron ore over a period of time.

“When we start supplying semi-finished products, we will realise the full synergies,” Muthuraman added.

He pointed out that though the margins of Corus are much less than Tata Steel, the latter will now begin to make it more competitive

Steep price

Manish Sonthalia, vice president (equity strategy), Motilal Oswal Securities, said: “The price is too steep and as a result the earnings of the company is likely to be affected for the next couple of years.”

Sonthalia said the company has made a high risk bet assuming that the steel cycle will remain at the current levels and further improve.

“However, the financing of the deal will substantially increase the debt burden of the company, thereby making a significant dent in the earnings,” he said.

Muthuraman said Tata Steel and Tata Sons would contribute $4.1 billion in equity for Tata Steel UK through which the acquisition will be routed. Though the company has not worked out the precise details of this funding structure, it will strive to see that its shareholders are not affected while at the same time take care of servicing the debt.

Responding to queries that the Tatas may have over-paid, Tata said, “We have to pay for getting the company... As a prudent management, we had taken a view that we would not go beyond a point... We did not reach that point... Had we reached, we would have walked away,” even as he added that overbidding or not is subjective when it comes to a judgement call.