scorecardresearchTata Steel shares end in the green but subsidiaries plunge up to 12% on merger approval

Tata Steel shares end in the green but subsidiaries plunge up to 12% on merger approval

Updated: 23 Sep 2022, 04:34 PM IST
TL;DR.
  • The board of directors of Tata Steel at its meeting on September 22, 2022, considered and approved seven schemes of amalgamation, Tata Steel said.
Tata Steel shares opened higher on September 23.

Tata Steel shares opened higher on September 23.

Shares of Tata Steel opened more than 2% higher on September 23 after the company announced the merger of seven of its subsidiaries - four listed and three unlisted - with it.

The stock, however, cooled off slightly as the trade progressed; it ended 0.58% higher at 104.25 on BSE.

In a BSE filing on September 23, the company announced the amalgamation of its subsidiary into the parent Tata Steel.

"The board of directors of Tata Steel at its meeting on September 22, 2022, considered and approved seven schemes of amalgamation," Tata Steel said.

With this, Tata Steel Long Products, Tinplate Company of India, Tata Metaliks, TRF, Indian Steel & Wire Products, Tata Steel Mining, and S & T Mining Company will merge with Tata Steel.

However, this development seems to have disappointed the stocks of the companies that are going to be merged with Tata Steel.

Shares of Tata Steel Long Products plunged 12% while those of Tinplate Company of India fell 6% and TRF fell 5%. Shares of Tata Metaliks declined 4.67%.

Tata Steel said the proposed amalgamation is aimed at driving synergies, simplifying the group holding and management structure, and consolidating and strategically growing downstream operations and engineering capabilities The Board has considered the proposal based on independent fairness and valuation opinions.

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It followed the process under the Companies Act, 2013 and the Securities and Exchange Board of India Regulations. The proposed amalgamation will enhance management efficiency, drive sharper strategic focus and improve agility across businesses based on the strong parental support from the Tata Steel leadership.

"On completion, there will be further opportunities to reduce overhead and corporate costs. Each of the proposed amalgamations will be value-accretive for shareholders," the company said. The Boards of all the amalgamating companies have also considered the proposals following due process and have unanimously approved the merger.

Per Jatin Damania, Vice President - Fundamental Research, Kotak Securities, the merger is a positive step as it will (1) simply the corporate structure, (2) plug leakage of additional royalty payments on inter-company iron ore transfers, (3) reduce corporate overheads (4) enable various businesses with the higher financial flexibility to progress on growth projects and (5) bring in further operational, procurement and tax synergies.

Damania has a 'reduce' rating on Tata Steel stock with a fair value (target price) of 110.

"While we await the company guidance on potential synergies, we estimate 7.5-8 billion of annual savings, equity dilution of 2.2% and potential earnings per share (EPS) accretion of 1.5-2%. The scheme will require various regulatory and shareholder approval and is likely to be complete by end of FY2024E," said Damania.

"We perceive the proposed amalgamation scheme in line with management’s strategic intent of simplifying the structure and unlocking value. In our view, the benefits of lower iron ore royalty cost are likely to be immediate, but the more strategic ones such as portfolio optimisation, a sharpened focus on long products and cross-functional benefits are likely to accrue over a period of time," said brokerage firm Edelweiss.

The brokerage firm has maintained a ‘hold’ on Tata Steel with an unchanged target price of 98.5 on 5 times Q2FY24E EBITDA.

"For the Tata Steel stock, we see the near-term benefits of cost/operating synergies being offset by potential dilution; however, the stock prices of subsidiaries are likely to recalibrate to the ones implied by the swap ratio," said Edelweiss.

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 of the analyst. These do not represent the views of MintGenie.

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First Published: 23 Sep 2022, 09:28 AM IST