Tata Steel’s Capital Structure Decision

Abstract

This report analyses Tata Steel's capital structure and recommends optimizing its leverage levels to create long-term shareholder value. Due to past acquisitions, Tata Steel is currently leveraged with a debt-to-equity ratio of 1.61x. However, the cyclical steel industry faces inherent risks, necessitating prudent financial management. A weighted average cost of capital analysis shows leverage increases Tata Steel's risk profile by raising its WACC. Scenario testing reveals higher debt weakens financial metrics during downturns compared to lower debt levels. Peer benchmarking finds Tata Steel's leverage exceeds global steel majors. The optimal capital structure is estimated at a 1.4x debt-equity ratio by balancing tax benefits and bankruptcy costs. Short-term strategies proposed include accelerating asset sales and debt restructuring. Maintaining a debt equity ratio of 1.4x through sustained deleveraging, working capital improvements, and selective expansions is recommended in the long term. This balanced approach can enhance financial flexibility to withstand volatility while creating shareholder value.