By Edelweiss research
We perceive the Tata Steel (TSL) board approving the amalgamation of seven subsidiaries with the parent as a prudent step. Key points: (i) Lower iron ore cost for subsidiaries such as TSLP and Tata Metaliks. (ii) Iron ore assets of the group are likely to be balanced through the lease life. (iii) Potential synergies across sales, marketing, procurement and logistics likely to accrue over medium to long term. For the TSL 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. Maintain ‘HOLD’ on TSL with an unchanged TP of Rs 98.5/share on 5x Q2FY24e Ebitda.
Benefits over medium to long term
The amalgamation scheme of seven subsidiaries with the parent, in our view, is likely to result in material benefits in the medium to long term. Key points: (i) Higher royalty on sale of iron ore to TSLP and Tata Metaliks, pursuant to MMDRA changes would not be there. In FY22, the additional royalty charge was Rs 3.9 bn for TSLP. (ii) Likely to balance iron ore assets of the group through the lease life, particularly the iron ore mine acquired pursuant to the NINL (Neelachal Ispat Nigam Ltd) transaction. (iii) Potential synergies in multiple areas. (iv) Provides firm direction to the group’s plans to enhance longs portfolio.
Streamlines product portfolio
We see the group’s long products’ strategy getting a firm direction as there could be sharper management oversight on expansion plan/integration of NINL. Besides, TSL’s existing long portfolio is likely dovetail with the proposed expansion, resulting in optimisation of product offerings. In our view, the amalgamated subsidiaries are also likely to benefit from TSL’s existing client base. On the procurement front, common sourcing of key raw materials such as iron ore and limestone would also reduce cost.
Outlook: Benefits to be realised over time; maintain ‘HOLD’ 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, sharpened focus on long products and cross-functional benefits are likely to accrue over a period of time. In terms of the stock reaction, for Tata Steel, we see the benefits of incremental Ebitda from subsidiaries to be offset by dilution in shareholding. The stock prices of listed subsidiaries are however, likely to recalibrate to the one suggested by the swap ratio. We maintain ‘HOLD’ on TSL with an unchanged target price of Rs 98.5 on 5x Q2FY24e Ebitda. Other listed subsidiaries of TSL are not rated.