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We see TATA’s Riversdale (RIV) stake divestment as achieving the best of both
worlds as it partially monetizes the investment. The inflow of $1.1B strengthens
the balance sheet and at the same time allows TATA partial resource security via
its 35% stake at the SPV level, which owns the Mozambique coal asset. We stay
OW and believe the current stock weakness, which we see as macro driver,
has created a good entry point.
RIV stake divestment at $1.1B: As we highlighted in our research on TATARIV (Rio makes formal bid for Riversdale-Options before TATA, dated 23 Dec,
2010), the most attractive option for TATA would be to monetize its
investment in RIV but at the same time retain some raw material security
given its holding in RIV at multiple levels. TATA owned ~27% in the
previously listed RIV and also 35% at the Benga Project SPV with a 40% offtake agreement. TATA has divested the ~27% holding in RIV for $1.1B at a
profit of ~$0.5B but retained the 35% holding at the Benga project SPV
level. The partial resource security would allow TATA some coking coal
benefits once production ramps up from Benga. Our fair value estimate of
Rs785 values the RIV stake at Rs31/share, while the stake sale implies a value
of Rs48/share. The divestment value implies a per-share sale value of A$16.5.
Implications for the balance sheet: The $1.1B cash inflow is a strong positive
for the balance sheet, in our view, given the investor concerns about TATA's
capex plans in Orissa. The net debt, which stood at $10.5B as of March-11 end,
would decrease to $9.5B after the stake divestment.
Current divestment part of ‘Portfolio Re-structuring’: We have argued that
TATA is likely to push towards portfolio re-structuring once the European
operations stabilize. TATA has taken a series of steps over the last 18 months,
including divesting Teeside in Europe, selling non-core stakes in various group
companies, further rationalizing European manufacturing footprint and now the
RIV stake divestment. Going forward we believe there are some residual stakes
in group companies which could see divestments, though this would not
materially reduce leverage.
Recent stock price weakness a macro driver; fundamental drivers remain
intact - Weakness a buying opportunity, in our view: TATA has corrected by
12% since April, as a) steel prices have corrected, b) the market has been
concerned about capex plans and subsequently leverage remaining high, and
lastly c) macro weakness as global growth slows down. In 2H FY12 steel prices
should move up as companies face higher raw material costs and production
pulls back, while the cash inflow from RIV stake sale highlights the company’s
focus of keeping leverage in check even as it embarks on capex. Macro-driven
weakness provides an entry opportunity given the key event of capacity
(profitable) commissioning in 4Q FY12E. TATA remains our top pick in the
Indian Steel universe.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
We see TATA’s Riversdale (RIV) stake divestment as achieving the best of both
worlds as it partially monetizes the investment. The inflow of $1.1B strengthens
the balance sheet and at the same time allows TATA partial resource security via
its 35% stake at the SPV level, which owns the Mozambique coal asset. We stay
OW and believe the current stock weakness, which we see as macro driver,
has created a good entry point.
RIV stake divestment at $1.1B: As we highlighted in our research on TATARIV (Rio makes formal bid for Riversdale-Options before TATA, dated 23 Dec,
2010), the most attractive option for TATA would be to monetize its
investment in RIV but at the same time retain some raw material security
given its holding in RIV at multiple levels. TATA owned ~27% in the
previously listed RIV and also 35% at the Benga Project SPV with a 40% offtake agreement. TATA has divested the ~27% holding in RIV for $1.1B at a
profit of ~$0.5B but retained the 35% holding at the Benga project SPV
level. The partial resource security would allow TATA some coking coal
benefits once production ramps up from Benga. Our fair value estimate of
Rs785 values the RIV stake at Rs31/share, while the stake sale implies a value
of Rs48/share. The divestment value implies a per-share sale value of A$16.5.
Implications for the balance sheet: The $1.1B cash inflow is a strong positive
for the balance sheet, in our view, given the investor concerns about TATA's
capex plans in Orissa. The net debt, which stood at $10.5B as of March-11 end,
would decrease to $9.5B after the stake divestment.
Current divestment part of ‘Portfolio Re-structuring’: We have argued that
TATA is likely to push towards portfolio re-structuring once the European
operations stabilize. TATA has taken a series of steps over the last 18 months,
including divesting Teeside in Europe, selling non-core stakes in various group
companies, further rationalizing European manufacturing footprint and now the
RIV stake divestment. Going forward we believe there are some residual stakes
in group companies which could see divestments, though this would not
materially reduce leverage.
Recent stock price weakness a macro driver; fundamental drivers remain
intact - Weakness a buying opportunity, in our view: TATA has corrected by
12% since April, as a) steel prices have corrected, b) the market has been
concerned about capex plans and subsequently leverage remaining high, and
lastly c) macro weakness as global growth slows down. In 2H FY12 steel prices
should move up as companies face higher raw material costs and production
pulls back, while the cash inflow from RIV stake sale highlights the company’s
focus of keeping leverage in check even as it embarks on capex. Macro-driven
weakness provides an entry opportunity given the key event of capacity
(profitable) commissioning in 4Q FY12E. TATA remains our top pick in the
Indian Steel universe.
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