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n Announces FPO of 57 mn shares
At its Board meeting today, Tata Steel has approved equity fund raising through Follow on Public Offer (FPO) of 57 mn shares (including 1.5 mn employee reservation). At CMP, this amounts to ~INR 37 bn. The company is likely to adopt the fast-track FPO approach (which shortens the process of regulatory approval). We believe the company may open the FPO in February.
n Dilution of 6% lower than earlier expectation of 8%
Based on media reports, INR 45 bn was expected to be raised at ~8% dilution. The announced issue, however, entails a dilution of ~6% (currently fully diluted shares are 914 mn, including promoter warrants), which is lower than expected.
n Issue targeted at lowering D:E ratio; funds likely to be used for capex
Tata Steel has consistently indicated raising of additional equity; such that considering the capex outlay of ~USD 2.1 bn per annum for next 2 years the D:E does not balloon further. We believe the funds would be largely used for funding this capex that includes the ongoing 3 mtpa brown-field expansion in Jamshedpur and the international raw material projects in Mozambique and Canada.
Considering this FPO, D:E as on March 31, 2011, is expected to drop from 1.8x to 1.6x, while that for FY12 would decline to 1.3x from 1.4x currently expected.
n Reduction in balance sheet risk offsets dilution issue
The equity dilution is near term negative for the stock. However, we believe balance sheet de-risking will improve the stock’s valuation multiples in the longer term. We currently value the European operations at EV/EBITDA of 5x. Considering the already executed refinancing (which has reduced cashflow stress) and the proposed FPO (which would reduce balance sheet risk), we believe the valuation drag of the European business on the stock would reduce further.
We have a ‘BUY’ rating on the stock with a price target of INR 781/share.
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