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Tata Steel |
Following on the restructuring path; Subscribe |
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Price Band: Rs 594- 610
n Tata Steel announced to issue 57 million shares as follow on public offering including 1.5 million shares for the employees
n At the higher and lower ends of the price band, the company would mop up Rs 34.8 billion and Rs 33.9 billion respectively
n On fully subscription, there would be an equity dilution of 6.3% and at the extended equity base the promoters’ stake would come down to 30.5% from 32.5%
n At our target price of Rs 712, on the upper end of the offer price band the stock has a potential upside of 17%. Recommend SUBSCRIBE
Raised amount to be used in easing debt burden, domestic expansion
As per the RHP filed by the company, the funds would be used mainly to de-leverage
the balance sheet (Rs 10.9 billion) as well as to fund its 2.9 million tonnes expansion
project at Jamshedpur (Rs 18.75 billion). At the end of the Q2FY11, the company’s
gross debt had gone up to US$12.5 bn (Rs 561.8 bn) and the net debt stood at US$10.7
bn (Rs 480.96 bn). On the expansion front, till the end of the Q2FY11, Tata Steel has
spent Rs 57.32 bn towards the 2.9 mtpa brownfield expansion out of a total capex of Rs
139 bn. For H2FY11 a sum of Rs 29.63 bn was earmarked. As per the management,
the project is likely to be commissioned during December 2011.
Continuous focus on de-leveraging
Tata Steel has been on a continuous process of restructuring its balance sheet to be
able to ease pressure of debt overhang including debt restructuring at Tata Steel
Europe, issue of warrants and preferential shares to promoters, issue of GDRs etc. We
feel the operational headwinds in the European operations in terms of higher raw
material costs are not going to be over in the near term. The company has been thus
carefully engaged into balance sheet restructuring and securing raw materials
integration. In this context, we believe, this is very conscious approach on the part of the
management to keep the company ready to grab the maximum benefits as and when
the industry as a whole comes out of the near- term challenges.
Outlook and Valuations
We believe higher raw material costs especially for coking coal and iron ore would
continue to have their negative impact on the industry as a whole. Though, the Indian
operation is almost insulated to this due to better backward integration, however, the
European operation would continue to feel the pain in the near- medium term. Despite
this, the strategy by the company to strengthen its balance sheet and partially integrate
its European operation from H2FY12, helps us to maintain a positive view on the stock.
At the CMP of RS 632, the stock is trading at 6.2x its FY12E EPS and 4.1x FY12E EV/
EBITDA. We maintain our target price of Rs 712/ share on the stock and assign
ACCUMULATE rating on the stock.
Recent balance sheet restructuring methods used by the company
The company has already taken various measures to restructure its balance sheet in recent
past. These are a) during September 2010 it signed Senior Facilities Agreement (SFA) with
a syndicate of 13 banks to replace in full the £3.53 billion term loan and revolving credit
facilities entered into during the Corus Group acquisition in 2007. The new financing
structure was in two parts: a 5-year loan of €2.2 billion and a 7-year loan of €0.9 billion and
US$0.4 billion. The revolving credit facilities for working capital purposes were increased to
£690 million and will have a tenor of 5 years, b) issue of up to 15 million ordinary Shares
and up to 12 million warrants on preferential allotment basis to the promoters at a price of
Rs 594 per share per warrant in July 2010, c) in November 2009 the company launched an
exchange offer for its existing US$875 million Convertible Alternative Reference Securities
(CARS) due 2012 with the new FCCB with a purpose to defer the repayment liability and
reduce the interest outgo, d) issuing of GDRs to raise a gross amount of US$500 million in
July 2010.
Deployment of the proceeds from the FPO
The company intends to deploy majority of the proceeds from the FPO to restructure its
debt and also in its 2.9 mtpa brownfield expansion at Jamshedpur in a phased manner.
Rest amount (~Rs 5120 million) would be used in general corporate purpose
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