BoB Capital Markets in its recent report on Tata Steel Ltd. has Reiterate BUY for an estimated target price of Rs 140 apiece. According to the brokerage, the stock is likely to jump 41% if the stock is purchased at the current market price.
Tata Steel is a large cap Tata Group Metal Sector company having a market cap of Rs 1,21,969 crore. Recently the company has proposed a merger with 7 group entities. According to the brokerage firm, the proposed merger will simplify the group structure and enable more efficient funding of NINL and mining expansions.
Stock Outlook & Returns
The current market price (CMP) of Tata Steel is Rs 99.85 on NSE. Its 52 week low is Rs 82.70 apiece and the 52 week high is Rs 142.66 apiece, respectively.
The shares in the past 1 week have fallen 3.15% and in the past 1 month 6.99%, respectively. Whereas in the past 3 months, the stock surged 17.08%, giving a positive return. Over the past 1 year, it has given 21.51% negative return. In the past 3 years, it gives 165.74% multibagger return, whereas, 52.65% positive return in the past 5 years.
Group structure being simplified
TATA has announced the merger of seven of its group entities with itself. The plan excludes Neelachal Ispat Nigam (NINL) where stake dilution is restricted at this stage. The merger will streamline the overall group structure, enable efficient utilisation of group facilities and optimisation of procurement, logistics costs and aid tighter working capital management.
Enables uncomplicated funding for NINL
Importantly, the merger will enable funding of NINL directly on TATA's balance sheet and also avoid the need for complex structures to extend support to long products subsidiary Tata Steel Long Products (TSLP).
The brokerage said, "We believe the merger is broadly value-neutral at the proposed swap ratios. While it will result in 2.2% dilution of TATA's shares, this would largely be offset by a lower share of minority interest in earnings and modest cost savings of Rs 7bn pre-tax mainly on account of additional royalty that is currently payable by TATA on the sale of captive iron ore to TSLP and Tata Metaliks (TML). Further cost optimisations can improve value. The changes are modest as subsidiary earnings are already accounted for in consolidated earnings."
We remain constructive on India's steel sector
While near-term uncertainty persists owing to the China slowdown, we believe steel margins will stabilise to midcycle levels over H2FY23. More importantly, we look forward to earnings growth from Indian steel players over FY23-FY26 as they deliver on the next wave of efficiency and value improvement and expansion projects.
Reiterate BUY for target price Rs 140
BoB Capital Markets commenting on the valuation said, "We are not revising estimates at this stage pending completion of the merger. We continue to prefer defensive play TATA (BUY, TP Rs 140) from amongst our steel coverage for its ability to generate sector-leading margins via better integration all the way to iron ore and for its focus on downstream and retail businesses to capture value-add. Our TP is based on a one-year forward EV/EBITDA multiple of 5.5x, which is below our 6x mid-cycle multiple for the Indian steel sector to account for global economic uncertainty."
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