Tata steel long products restructuring its groups companies starting with metal ones to simplify management

Tata Sons recently announced the merging of seven of its firms with Tata Steel, a move that the company has long sought to make in order to streamline administration for its group companies. Tata Group has a vast number of unlisted subsidiaries, joint ventures, and other businesses in addition to its nearly 29 listed firms. Therefore, managing such a big number of businesses is indeed challenging. Tata therefore intends to liquidate some of its unlisted companies or merge them with larger ones and minimise the number of listed companies in their group of companies.

For this reason, Tata Steel’s board approved the merger of its seven subsidiaries — Tata Steel Long Products, Tata Metaliks, The Tinplate Company of India, TRF Limited, Indian Steel & Wire Products, Tata Steel Mining, and S&T Mining — into itself on Friday. Koushik Chatterjee, the CFO of the steel giant, stated that the merger of seven firms with Tata Steel will enable management simplicity and support a greater focus on the business. Tata Steel has cut 116 connected firms since 2019, with 72 subsidiaries ceasing to exist, 20 associates and joint ventures being liquidated, and 24 corporations being in liquidation.

Synergizing strategy to better focus on growth scale & improve cash flows in large companies

The plan adheres to Tata Steel’s plan to make the group structure simpler. As companies like Tata Steel Long Products and Tata Metaliks pay additional royalties for buying iron ore from Tata Steel, this merger would also result in cost savings. However, after the merging, this would no longer be necessary.

“In our opinion, 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 time,” Edelweiss Securities Ltd. stated in a report dated September 23.

Further, Tata aims to achieve governance simplicity, as a lot of management time gets saved with lessser number of entities to manage.. This will also provide greater access to capital, engineering, and project capabilities along with sharing a lot of other corporate costs. Lastly, company said there would be a small dilution in stake of Tata sons in the range of 0.7% after the share swap is decided. The brokerages believe that dilution in shareholding will outweigh the advantages of increased EBITDA from subsidiaries for Tata Steel in terms of stock reaction.

According to Motilal Oswal Financial Services analysts, “there is no change in our earnings forecasts at this time as we wait for clarity on the synergies and timetables for the transaction.”

You may also like: Mid cap Tata Elxsi company

Effect on share prices of Tata Steel & peers

Brokerages continue to have a bullish outlook despite the fact that the share prices of the listed tata companies that are scheduled to merge fell in back-to-back trading sessions. The companies experienced a decline after the announcement, but were rising before that, said the head of Tata Sons. Veteran employees of the corporation claim that the decision to merge the entities isn’t made hastily but rather after consulting the boards of all the entities to be merged in dozens of meetings. So, in order to assess the wider picture, it would be preferable to focus on long-term prospects rather than recent losses.

With a target price of 140, brokerage company BOB Capital Markets Limited (BOBCAPS) maintained its buy call on Tata Steel, representing a 34% increase from the stock’s closing price of 104.25 on September 23. According to BOBCAPS, the merger will simplify the overall group structure, enabling effective use of the group’s facilities, optimise the expenses associated with procurement and transportation, and support more stringent working capital management.

Lastly, while domestic markets’ demand is still relatively low, prices have begun to stabilise. Steel Mint reports that during the past two weeks, hot-rolled coil (HRC) prices have risen steadily after a protracted period of unrestrained collapse. Undoubtedly, domestic HRC costs are still higher than the landed costs of imports from China and the Far East. Therefore, the next couple of quarters might face slight challenges but overall situations appear to stabilize.

Tata Steel will give 67 shares for every 10 shares of Tata Steel Long Products and 17 shares for every 10 shares of TRF. While the raio in case of Tinplate company of India says that every 10 shareholders of Tinplate will receive 33 shares of Tata Steel, whereas for every 10 shares of Tata Metaliks 79 shares of Tata Steel will be alloted.

This is the first step by the Tata Group towards minimising its total number of companies and consolidating all companies within a single sector. We could see a few more consolidation by sectors in the near future.

 

About the Author

Ketan Sonalkar (SEBI Rgn No INA000011255)

Ketan Sonalkar is a certified SEBI registered investment advisor and head of research at Univest. He is one of the finest financial trainers, with a track record of having trained more than 2000 people in offline and online models. He serves as a consultant advisor to leading fintech and financial data firms. He has over 15 years of working experience in the finance field. He runs Advisory Services for Direct Equities and Personal Finance Transformation.

Note – This channel is for educational and training purpose only & any stock mentioned here should not be taken as a tip/recommendation/advice

You may also like: Adani’s group’s market