Why Brokerages Cut Tata Steel’s Target Price After Thyssenkrupp Deal

After Tata Steel Ltd.’s board approved a joint venture with Germany’s Thyssenkrupp A.G., most brokerages cut target price of the Indian steelmaker citing that its economic interest in the partnership will fall at the time of a potential initial public offering.

The two partners will have to hold a combined stake of at least 50 percent for at least six years, Tata Steel said in a conference call with analysts on Saturday. At the time of the initial public offering upon conversion of warrants, Thyssenkrupp’s stake can increase to 55 percent.

The revised target price reflects Tata Group’s reduced economic interest (in case of an IPO) and lower profitability from Tata Steel, Investsec said in a note.

The decision on timing of the joint venture’s IPO would also rest exclusively with ThyssenKrupp, the brokerages said. Besides, post due-diligence, the band of guided synergies has been reduced by 100 million euros to 400-500 million euros compared to what the management said in September 2017.

The joint venture would make the combined entity the second-largest flat steel producer in Europe with:

• 21 million tonnes deliveries.
• 17 billion euros in revenue.
• Ebitda of 1.7 billion euros.

Here’s what the brokerages had to say on the deal:

CLSA

• Maintains ‘Buy'; target price cut to Rs 855 from Rs 920 on lower multiple.
• Reduces target multiple (EV/Ebitda) to 7.5x of FY20 estimates from 8x earlier, mainly due to contraction in global steel valuations.
• Signing of the agreement should assuage a key uncertainty.
• See the transaction as earnings and value-accretive Tata Steel even without synergies.

Macquarie

• Restricted on the stock.
• The dividends from joint venture to help meet liabilities of Tata Group’s $2.6 billion foreign debt.
• Management expects to realise 400-500 million euros of annual synergies over three years.
• Expects more than a third of the synergy benefits to be realised in the first year itself.

Investsec

• Maintains ‘Buy’; reduces target price to Rs 741 from Rs 777.
• A major overhang is past, but a bloated balance sheet remains a concern with the impending Bhushan Power and Steel acquisition.

Kotak Institutional Equities

• Maintains ‘Add’; cuts target price to Rs 700 from Rs 710 earlier.
• Overall positive for the company’s financials.
• Tata Steel can transfer 2.5 billion euros of debt to the joint venture, especially after Bhushan Steel buyout.