Tata Steel is planning to raise Rs 34.80 billion (at the upper band via 57 million shares) diluting 5.50% of its post-issue fully-diluted equity. Post FPO, promoters` stake on fully diluted basis would decline by 1.7% to 29.5%. The proceeds of the issue would be utilised mainly for part-funding of capex at Jamshedpur (Rs 18.80 billion) and payment on maturity of debentures in FY12 (Rs 10.90 billion).
Tata Steel has fixed a price band of Rs 594 - Rs 610 for each equity share for its follow-on public offer (FPO) of 57 million ordinary shares of Rs 10 each of the company. The company is expected to raise Rs 33.85-34.77 billion through this offering. The anchor book opens and closes on Jan. 18, 2011. The issue opens on Jan. 19, 2011 and closes on Jan. 21, 2011.
Established in 1907, Tata Steel (Q,N,C,F)* Group is among the top ten global steel companies with an annual crude steel capacity of over 27 million tonnes per annum (mtpa). It is now one of the world``s most geographically-diversified steel producers, with operations in 26 countries and a commercial presence in over 50 countries. The Tata Steel Group, with a turnover of USD 22.8 billion in FY`10, has approximately 81,000 employees across five continents and is a Fortune 500 company.
PINC RESEARCH has recommended `Subscribe` to the issue with the following investment rationale:
Brownfield expansion on track to increase share of profitable Indian operations: Tata Steel (Q,N,C,F)* is incurring a total capex of Rs 163.7 billion to raise capacity by 2.9mn tpa in Jamshedpur by FY12 end. This would increase output share of highly profitable Indian operation (FY11E EBITDA/t of USD380 vs consolidated USD 141) from current 27% to 35% post expansion. We believe that this could result in an 18% rise in consolidated EBITDA/t.
Turnaround in Tata Steel Europe (TSE): With improved capacity utilisation and leaner cost structure, TSE has turned around with sustainable EBITDA/t of USD 50. With expected partial raw material integration by FY12-end (Benga coking coal project in Riversdale and DSO iron ore project in New Millennium), we believe that TSE`s profitability would improve further FY13 onwards.
Financial deleveraging: FPO proceeds would reduce company`s fully diluted net D/E from current 1.2x to 1.0x. We expect further decline to 0.6x by FY12. An improved balance sheet would aid the company in meeting its debt covenants and expedite future expansion projects in Orissa, Chhattisgarh and Karnataka.
Valuations & Recommendation:
Contract prices for Q4FY11 has settled at higher level due to increased spot prices. Coking coal spot price continues to strengthen, as floods in Australia disrupt supply. We believe high raw material prices would exert further pressure on steel processing margin in FY12. However, integrated operation of Tata Steel India would benefit from rising steel prices on cost push. At FY12E EV/EBITDA of 4.8x and 4.9x at upper band of FPO and CMP respectively, the stock is attractively valued. We maintain `BUY` on the stock with a revised target price of Rs 817 (blended 6.1x FY12E EV/EBITDA). Recommend `SUBSCRIBE` to FPO.
The anchor book opens and closes today, Jan. 18, 2011 nearly subscribed by 8 times. The issue opens on Jan. 19, 2011 and closes on Jan. 21, 2011.
Shares of the company closed at Rs. 632.45, up Rs 9.55 or 1.53% in NSE and at Rs. 632.60, up Rs. 6.95 or 1.11% in BSE today i.e., on 18.01.2011. The total volume of shares traded was 1,052,685 at the BSE (Tuesday).
