Amalgamation a plus, but not enough for Tata Steel stock

Market


Tata Steel Ltd’s amalgamation scheme to merge its seven group companies with itself is a step in the right direction. Its shares rose 0.7% on Friday, a day the Nifty 50 index fell 1.72%. Shares of four listed companies with which Tata Steel intends to amalgamate fell by 5-12% on Friday, tracking their respective swap ratios. These include Tata Steel Long Products Ltd, The Tinplate Co. of India Ltd, Tata Metaliks Ltd, and TRF Ltd.

The scheme is in keeping with Tata Steel’s strategy of simplifying the group structure. This amalgamation would also enable cost savings as companies such as Tata Steel Long Products and Tata Metaliks pay additional royalty for procuring iron ore from Tata Steel. However, this would not be required post the amalgamation.

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“In our view, the benefits of lower iron ore royalty cost are likely to be immediate, but the more strategic ones such as portfolio optimization, a sharpened focus on long products and cross-functional benefits are likely to accrue over a period of time,” Edelweiss Securities Ltd said in a report dated 23 September.

In terms of the stock reaction, for Tata Steel, the brokerage sees the benefits of incremental Ebitda from subsidiaries to be offset by dilution in shareholding. Ebitda is earnings before interest, tax, depreciation and amortization.

“There is no change in our earnings estimates at present as we await clarity on the synergies and timelines for the merger,” analysts from Motilal Oswal Financial Services said.

As such, meaningful near-term triggers for Tata Steel stock, 27% below its 52-week high seen in October, are few and far between. “Steel spreads have contracted significantly, which is likely to weigh on company’s earnings over next couple of quarters. European operations would likely remain somewhat insulated in Q2 and Q3FY23, courtesy of long-term contracts,” said Satyadeep Jain, an analyst at Ambit Capital.

“However, Tata Steel Europe is bracing for a difficult Q4FY23, as long-term contracts would roll off by then, while higher energy prices in winter would hurt demand and keep costs elevated,” he said.

In domestic markets, while demand continues to remain muted, there is some respite with respect to prices. After a considerable period of free fall, the hot-rolled coil (HRC) prices rose consecutively in the last two weeks, according to SteelMint. To be sure, domestic HRC prices continue to be at a premium to the landed cost of imports from China and the Far East.

As such, Tata Steel, like its peers, faces risk from a potential rise in imports.

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