Buy Tata Steel; target of Rs 750: Prabhudas Liladhar

Prabhudas Liladhar's research report on Tata Steel

Tata Steel (TATA) and ThyssenKrupp AG signed a MoU to form a 50:50 Joint Venture (JV) for merger of flat steel operations of both the entities in Europe and the steel mill services of the ThyssenKrupp Group. JV would make combined entity the second largest steel producer in Europe with production of 22mn tonnes and market share at 14% (based on production). It will have debt of €6.5bn that includes a) senior debt of €2.5bn carved out of Tata steel Europe (TSE) and b) €4bn of unfunded pension and other legacy liabilities of ThyssenKrupp. JV expects synergy benefits of €400‐ 600mn/year by FY20. Management expects to close the transaction by Q3FY19.

Outlook

We believe that the JV is structurally positive for TATA as its debt (based on 50% economic interest) exposure for European operations would come down by ~30% to €3.25bn from the current €4.7bn with higher EBITDA base of €783mn, 12% above the current EBITDA. High dividend pay‐outs from JV would help service the residual debt. The JV would help the company to strengthen its focus on India. Management guided to double the capacity of Indian operations to 26m t in the next five years. We reiterate “BUY” with a revised TP of Rs750 (earlier Rs675) to factor in debt reduction and higher multiples for JV.