The big consolidation drive by Tata Steel isn’t expected to have any material impact on the financials of the company over the long term, according to most brokerages. However, these brokerages have refrained from putting any target price or adopting a change of rating stance in the absence of clarity in terms of financial benefits from synergies, and the timelines involved.
On September 23, the company announced that it would be amalgamating seven subsidiaries with itself and that their resources would be pooled to unlock shareholder value. However, it noted, this would require several approvals, including from stock exchanges and the NCLT, among others.
The following are key takeaways from brokerages:
JP MorganMaintains an overweight rating with a target price of Rs 140 per share. The foreign brokerage sees a very marginal impact from the consolidation drive on the financials of the company. According to the brokerage, markets and investors anyway look at the earnings and balance sheet on a consolidated basis and all the subsidiaries are part of the consolidated accounts.
The brokerage has listed Tata Steel Longs as the key subsidiary for the benefits of the proposed merger, given its acquisition of NINL. According to the brokerage, the proposed merger is incrementally positive as it should allow for a faster rollout of expansion capex. JP Morgan sees the company’s price-to-book value at around 2009/2014/2020 lows, even as its underlying balance sheet is the strongest it has been in 10+ years.
The brokerage has maintained a neutral rating with a target price of Rs 106. Motilal Oswal, too, doesn’t expect any incremental profits to accrue to the group and expects no incremental profits other than elimination of regulatory costs such as iron ore royalty.
It expects further consolidation on the books. Motilal Oswal said it expected simplification of the group structure to continue, but that a big reduction in the number of subsidiaries would only occur after the sale/closure of its international subsidiaries, including TSE, TSTH, and NatSteel, if at all. The brokerage has not changed its earnings estimates at present, as it awaits clarity on synergies and timelines for the merger. In terms of P/B, the stock is trading at 1.1 times/1 time its FY23E/FY24 estimated book value.
Edelweiss SecuritiesPerceiving amalgamation as a prudent step, Edelweiss Securities has maintained its hold rating on Tata Steel with an unchanged target price of Rs 198.5 per share. It sees lower royalty, iron ore costs and potential synergies as the key benefits over the medium to long term. It also believes that this amalgamation will provide a firm direction to the group’s plan of enhancing its long portfolio. However, Edelweiss Securities expects the benefits of incremental EBITDA from the subsidiaries to be offset by the dilution in the shareholding. The brokerage expects the stock prices of listed subsidiaries to recalibrate to the one suggested by the swap ratio.