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The acquisition of Neelachal Ispat Nigam Ltd (NINL) by Tata Steel's subsidiary Tata Steel Long Products (TSLP) is credit positive, said Moody's Investors Service on Monday.

Tata Steel, on January 31, announced that its 74 per cent-owned subsidiary TSLP will acquire a 93.7 per cent stake in NINL for Rs 121 billion ($1.6 billion).

"The acquisition will give TSL access to NINL's 1.1 million tonnes per annum (mtpa) of long-steel producing capacity, 100 million tonnes of iron ore reserves and 2,500 acres of land. Still, NINL is loss-making and we believe the acquisition price largely reflects the steel plant, iron ore reserves and the land acreage that can accommodate capacity expansions," Moody's Investors Service said in a note.

"And, while the acquired operations are substantially smaller than TSL's current global capacity of 32.5 mtpa, including its 19.6 mtpa capacity in India, it is credit positive because it will increase TSL's long-steel product capacity and increase its reserves of iron ore."

Besides, the note said that acquiring NINL's additional 100 million tonnes (mt) of iron ore enriches TSL's already large reserve.

"Additionally, NINL's proximity to TSL's Kalinganagar operations will provide operational and logistic synergies, resulting in cost savings."

TSL expects to fund the acquisition through a combination of internal accruals and debt, the note said. "Even assuming the $1.6 billion enterprise value is paid entirely through debt, we estimate TSL's pro forma leverage at September 2021 would climb to '1.8xa¿."'

"To the extent the acquisition is funded through internal accruals, the peak pro forma leverage would be less than '1.8x'."