Tata Steel Rating: Hold| Mega merger to bring in material benefits 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. Also Read: FPIs pump in Rs 8,600-cr in Sep; pace of investment slows Streamlines product portfolioWe 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.
Last Friday, WTI and Brent slid 3% after strong U.S. jobs data raised concerns that the Federal Reserve would keep raising interest rates, which in turn boosted the dollar. While recession fears dominated the market last week, on Sunday International Energy Agency (IEA) Executive Director Fatih Birol highlighted that China’s recovery remains a key driver for oil prices.
“If demand goes up very strongly, if the Chinese economy rebounds, then there will be a need, in my view, for the OPEC+ countries to look at their (output) policies,” Birol told Reuters on the sidelines of a conference in India.Price caps on Russian products took effect on Sunday, with the Group of Seven (G7), the European Union and Australia agreeing on caps of $100 per barrel on diesel and other products that trade at a premium to crude, and $45 per barrel for products that trade at a discount, such as fuel oil.
“For the moment, the market expects non-EU countries will increase imports of refined Russian crude, thus creating little disruption to overall supplies,” ANZ analysts said in a client note. “Nevertheless, OPEC’s continued constraint on supply should keep the market tight,” they said.