Brokerage firm BOB Capital Markets Limited (BOBCAPS) retained a buy call on Tata Steel with a target price of ₹140, implying a 34% upside from the stock's September 23 closing of ₹104.25.
The brokerage firm has retained a positive view on Tata Steel stock after the company announced the merger of seven of its group entities with itself.
In a BSE filing on September 23, the company announced the amalgamation of Tata Steel Long Products, Tinplate Company of India, Tata Metaliks, TRF, Indian Steel & Wire Products, Tata Steel Mining, and S & T Mining Company with Tata Steel.
BOBCAPS believes the merger will streamline the overall group structure, enable efficient utilisation of group facilities and optimisation of procurement, and logistics costs and aid tighter working capital management.
"We believe the merger is broadly value-neutral at the proposed swap ratios. While it will result in a 2.2% dilution of Tata’s shares, this would largely be offset by a lower share of a minority interest in earnings and modest cost savings of ₹700 crore pre-tax mainly on account of additional royalty that is currently payable by Tata on the sale of captive iron ore to TSLP and Tata Metaliks (TML). Further cost optimisations can improve value. The changes are modest as subsidiary earnings are already accounted for in consolidated earnings,' said BOBCAPS.
While near-term uncertainty persists owing to the China slowdown, BOBCAPS believes steel margins will stabilise to midcycle levels over the second half of FY23 (H2FY23). More importantly, BOBCAPS looks forward to earnings growth
from Indian steel players over FY23-FY26 as they deliver on the next wave of efficiency and value improvement and expansion projects.
"We are not revising estimates at this stage pending completion of the merger. We continue to prefer defensive play Tata (buy; target price of ₹140) from amongst our steel coverage for its ability to generate sector-leading margins via
better integration all the way to iron ore and for its focus on downstream and retail businesses to capture value-add," said BOBCAPS.
"Our target price is based on a one-year forward EV/EBITDA multiple of 5.5 times, which is below our 6 times mid-cycle multiple for the Indian steel sector to account for global economic uncertainty," said the brokerage firm.
According to a MintGenie poll, an average of 30 analysts have a ‘buy’ call on the stock.
Disclaimer: The views and recommendations given in this article are those of the broking firm. These do not represent the views of MintGenie.