Tata Steel’s amalgamation scheme may not move the needle on the stock

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Tata Steel Ltd. on Friday said it will merge with itself six of its subsidiaries and an associate company. These include listed entities such as Tata Steel Long Products Ltd (TSLP), The Tinplate Company of India Ltd (TCIL), Tata Metaliks Ltd (TML) and TRF Ltd.

For every ten shares of TSLP, Tata Steel shall allot its 67 shares to TSLP’s shareholders (67:10). Similarly, the merger ratio for TCIL, TML and TRF stand at 33:10, 79:10 and 17:10, respectively.

This scheme is in line with Tata Steel’s strategy of simplifying the group structure. The amalgamation would enable synergies in logistics, procurement, strategy and expansion projects.

Even so, Edelweiss Securities does not see much impact on the Tata Steel stock in the short term as dilution will be compensated by incremental Ebitda (earnings before interest, tax, depreciation and amortization) from subsidiaries/cost savings. “However, there could be some cool-off in subsidiaries as stock prices seem to have run ahead of the one implied by the swap ratio,” they said in a note.

Shares of Tata Steel rose just 1.5% on Friday on the National Stock Exchange, while those of TSLP, TCIL and TMLfell 3%-9%. The Nifty 50 index was down around 1%.

In any case, shares of these steel companies are far from their respective 52-week highs. Weak demand for the metal and falling steel prices have weighed heavily on investor sentiment.

But some respite appears to be around the corner. Domestic hot-rolled coil (HRC) prices in traders’ market rose 1% week-on-week, or 500 per tonne, mirroring the mid-September hike taken by companies such as AM/NS India, JSW Steel Ltd and Tata Steel, Edelweiss Securities said in a report on 22 September. AM/NS is a joint venture between ArcelorMittal and Nippon Steel. This is the first HRC price hike taken by key companies after the levy of export duty on the metal by the government.

Also, production cuts by steel companies have resulted in comfortable inventory. Hereon, growth in demand is crucial. The upcoming seasonally strong H2FY23 augurs well.

To be sure, domestic HRC prices continue to be at a premium to the landed cost of imports from China and far-east. As such, domestic steel companies face risk of higher imports.

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