JP Morgan considered Tata Steel to be ideally positioned as a stock given the confluence of global industry tailwinds, domestic tailwinds and company restructuring.
The Tata Group firm, on June 17, said it has proposed to sell 8,36,37,697 equity shares of face value of Rs 2 each of Tata Motors to Tata Sons Limited.
The transaction is expected to be executed on or after June 23, 2017 at or around the prevailing price on the date of proposed sale, subject to no material market movements in price since the date of this disclosure, it added.
At Friday's market close, the Tata Motors' stake would be worth Rs 3,800 crore or 7.7 percent of Tata Steel's market capitalisation.
According to the research house, this is another positive as the monetisation of the stake provides Tata Steel with additional balance sheet flexibility.
"While the company has over the past few years consistently monetised group stakes, in our view the timing for the current one is interesting and in our view likely signals progress on the UK pension issue for which a payout is required (550 million pound) and also potentially progress on the KPO Phase 2 expansion plan," JPMorgan said.
Tata Steel reduced its debt materially in Q4FY17. It has achieved closure of the defined benefit pension scheme at Tata Steel UK. This has resulted in a non-cash charge of Rs 3,600 crore. The key commercial terms with the pension trustees have been agreed in principle and include a one-time payment of 550 million pound and the provision of a 33 percent equity stake in Tata Stel UK.
Post this, Tata Steel UK would sponsor a new scheme which would likely start with a surplus. All this would take time given the detailed documentation and approvals. Once these are in place, Tata Steel would likely start the process of due diligence on the potential JV of its European business with TKA. On Phase 2 KPO expansion (3/5MT), Tata Steel had highlighted that it has not yet taken a decision, the brokerage house said.
While retaining overweight rating on the stock with a target price of Rs 690, it considered Tata Steel to be ideally positioned as a stock given the confluence of global industry tailwinds (lower Chinese steel exports), domestic tailwinds (policy support with multi-year steel price protection, improving demand outlook) and company restructuring (likely JV for the European steel business).
At 14:48 hours IST, the stock price was quoting at Rs 516.85, up Rs 14.75, or 2.94 percent on the BSE.Posted by Sunil Shankar Matkar