Tata Steel FPO Review : Primary market in the first month of the new decade is all set to taste a big ticket public issue in the form of Tata Steel’s Follow on Public Offer (FPO). This public issue of India’s largest steel maker will hit the capital markets between January 19 to 21. Tata Steel has fixed the price band of Rs. 594-610 per share for its follow on public offer (FPO) of 5.7 crore shares. At the higher end of the price band of Rs. 610 per share, the company is expected to raise Rs.3,477 crores from the FPO, while at the lower end of price band at Rs. 594 per share, it will raise Rs. 3,385 crores. The company has fixed a bid lot of a minimum of 10 equity shares and in multiples of 10 shares thereafter for the issue which comprises a net issue to the public of 5.55 crore shares and a reservation of 15 lakh shares for subscription by eligible employees.
Objects of the Issue : Tata steel, the seventh largest steel maker in the world, will utilize the share proceeds for the following purpose :
- To part finance the Company’s share of capital expenditure for expansion of existing works at Jamshedpur
- To pay for redemption amounts on maturity of certain redeemable non-convertible debentures issued by the Company on a private placement basis
The expansion work at the Jamshedpur plant, which is scheduled for completion by March 2011, will augment the steel production capacity of the plant to 10 million tonnes per annum. Also the redemption of non-convertible debentures held by other Tata Group companies will help in deleveraging Tata Steel’s Balance Sheet.
Financials : Tata Steel has grown significantly in recent years with its steel production capacity increasing from 5.0 mtpa in FY 2006 to 27.2 mtpa currently. This growth was primarily due to the acquisition of Corus Group Plc. In April 2007. As seen in the table, the net sales of Tata Steel have been constantly on the rise. As of September, 2010, Net sales stand at Rs.13,658 crores. The Net Profit of the company has also been growing steadily except for the FY2010, where some pressure is visible on the margins leading to a meagre fall in profitability. Also, the PAT of the half year ended stands at Rs. 3,645 crores keeping up with the upside trends in profitability. The Balance of the company reveals a mounting debt pressure from FY 2009 onwards, which is primarily there as a result of overseas mergers and acquisitions. It is to ease this debt liability in the form of non-convertible debentures, that the company is coming up with a public issue. Tata Steel had total assets of Rs.1,21,368 crores and a total net worth of Rs.27,742 crores as of September 2010.
Valuation (Pricing of the issue) : Price of the FPO, in which Tata Steel is off loading its 5.94 per cent stake, is offered at a discount of 5 to 8 per cent from stock price of the date of announcement, which stood at Rs 647.6 a share. Considering an EPS of Rs. 57.3 for Tata Steel (standalone) and a composite steel industry P/E multiple of 10.9, the issue within a price band of Rs. 594-610 seems fairly priced. Also the Net Asset value per equity share of Tata Steel as of September 2010 stands at Rs. 463.6. However this being an FPO, meaning that the share is already listed on the Indian stock exchanges, pricing is always a tricky task. Since the announcement of this issue, Tata Steel’s stock price has fallen by around 4% and closed at Rs. 621.71 on Friday.
Strengths : Tata Steel has its principal operations in India, Europe and Asia Pacific. It enjoys a very strong position in India as compared to its Indian peers like JSW Steel, Sail and Bhushan Steel. Europe, which is a key market for the company accounts for almost 47% of its net sales. Regular supply of raw materials and cost competitiveness have given it an edge over other steel majors. With the acquisition of Corus in 2007 and utilizing its operational best practices, Tata Steel now has diversified product offering and that too at a highly competitive price.
Risk Factors : Though Tata Steel is a global heavy weight in the steel industry, but still it is exposed to a large number of operational risks. Steel industry is greatly affected by global economic conditions. A slower than expected recoverycan materially effect the steel industry and Tata Steel is no exception. Also, the steel industry is highly cyclical and a decrease in steel prices can adversely effect the financial health of the company. In addition to the risk factors associated with entities working in the core industrial sector, Tata Steel is also exposed to the uncertainties associated with the implementation of the Mines and Minerals (Development and Regulation) Bill, 2010 (the MMDR Bill). The new bill proposes to provide for ownership of the mining companies by allotting 26% of the shares to the stakeholders as compensation. It also seeks to rationalise royalties, taxes, cesses and auction procedures of mining blocks. Mines and steel cannot be analysed in isolation, as the former provides the raw material for the latter.
Looking at the strong fundamentals of the company, it appears to be a long term investment option. However, looking at the choppy markets and the nature of the issue (being an FPO), it may not lead to huge listing gains. So take a call after analysing your risk appetite and financial goals.
Please feel free to share your thoughts about the upcoming public issue and its. Your feed back would be highly appreciated.
Disclaimer : All the information and financial numbers published in the above review have been obtained from the RHP of Tata Steel filed with SEBI. MONEY MATTERS has only reproduced those numbers in a simple manner to assist you in taking better informed investing decisions.
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