ADVERTISEMENT

Tata Group Changing Divestment Strategy Could Be A Concern: BoAML

BofAML sees a near-term impact on stock prices of listed Tata companies. 

Bombay House, Tata headquarters in Mumbai (Photographer: Harsunit Pal/BloombergQuint) 
Bombay House, Tata headquarters in Mumbai (Photographer: Harsunit Pal/BloombergQuint) 

The change of guard at the Tata Group was ‘unexpected’ and the uncertainty is likely to impact stock prices in the near term, according to Bank of America Merrill Lynch.

Cyrus Mistry’s ouster could have been prompted by the board wanting a change in the group strategy, the brokerage house wrote in a note to clients. While it sees no major change in the operating strategy of individual companies, Bank of America Merrill Lynch said it will keenly observe the choice and timing of resource allocation by the new chairman.

BoAML said a change in strategy of asset sales at the group’s steel and chemical plants may be seen as a cause of concern. It said there are many other candidates among group companies that are potential divestment candidates.

The firm also remained cautious on most of the stocks under the group.

Tata Group Changing Divestment Strategy Could Be A Concern: BoAML

Tata Consultancy Services

  • Rating: Underperform
  • Target: Rs 2,375

BoAML believes that neither has the company seen any major shift from its key growth planks in the last four years, nor has the organisational structure seen any significant change. The company remains one of the strongest in the information technology services sector, it wrote in a note.

It does not see any change in the company's growth outlook on account of the recent turn of events. However, it maintains an ‘Underperform’ rating on the stock due to the near-term uncertainties as well as its premium valuations despite subdued earnings growth outlook.

Tata Motors

  • Rating: Buy
  • Target: Rs 625

BoAML believes that the company continues to turnaround the standlone operations as well as focus on growth in Jaguar Land Rover through new products. The appointment of Guenter Butschek as the managing director for India operations should ensure continued leadership for the company.

Tata Power

  • Rating: Underperform
  • Target: Rs 72

The company has now altered its growth strategy to focus on short-cycle projects and the fast growing renewable energy space. The company is expected to continue on these strategies that were initiated before the appointment of Cyrus Mistry as chairman.

BoAML believes the losses at Mundra to reduce to Rs 220 crore by FY19 and an earnings CAGR of 11 percent from FY16-19. It maintain an ‘Underperform’ rating on the stock as it expects continued delays in augmentation of cash flow due to unlikely sale of stakes in several group telecom companies and delays over stake sale in its Arutmin coal mine.

Titan

  • Rating: Neutral
  • Target: Rs 415

The company continues to scale up operations in jewelry, watches and eye-wear through store expansions despite the change in leadership. BoAML maintains a 'Neutral' rating on the stock due to uncertainty in the jewellery segment.

Voltas

  • Rating: Underperform
  • Target: Rs 315

BoAML expects the Unitary Cooling Products (UCP) segment to drive the company's growth going forward and estimates a 20 percent earnings CAGR in the FY16-19E. A change in leadership is unlikely to have an impact on the future outlook.

It maintains an 'Underperform' rating on the stock as the current price factors in a strong FY17-18 and that electro-mechanical project margins and receivables are likely to remain under pressure.

Tata Communications

  • Rating: Buy
  • Target: Rs 764

BoAML maintains a ‘Buy’ rating on the stock but highlights a slower-than-expected data revenue growth and a significant slowdown in the under-sea voice business as some of the key risks to the upside.

However, the sale of the African telecom business Neotel and a partial sale of the data center business will contribute almost 16 percent to the company's FY17 EBITDA while reducing the expected debt for FY18 to 1.5 times from 2.8 times.