MUMBAI: Both domestic and foreign brokerages have given thumbs up to Tata Steel's Rs 23,500 crore expansion plans with Rs 12,800 crore rights issue citing the growth visibility. Though the organic expansion at Odisha could have been largely funded through a combination of internal accruals and debt, without a large equity dilution, company would have faced limited headroom to acquire large assets entirely funded via debt given that its consolidated net debt to equity ratio of 2.1, said analysts. Shares of Tata Steel gained 75% so far this year from Rs 405.95 on 1 January to Rs 703 on Wednesday as against 28% gain in Nifty and 43% rise in NSE Metal index.
This is what various brokerages to say on the expansion plans:
Tata's Board has approved a relatively large-sized equity issuance plan, but this seems justified given that it has large organic and inorganic growth opportunities in India, especially when industry demand-supply is tightening. We view the decision of the 5mtpa organic expansion in India as a positive, but note that the next phase of organic volume growth in India will start only by FY 2023. We retain buy with Rs880 target price.
The expansion would take Tata Steel's India's capacity to 18mtpa. Note that management had indicated plans to double capacity in 5 years. We expect some debottlenecking at Jamshedpur with the rest likely via inorganic route. Tata Steel's plans to double capacity in 5 years providing growth visibility while attractive M&A and Tata-Thyssen JV could provide further stock upside. Strong spreads, captive India iron ore, improving leverage, reasonable valuations should benefit the company.
This money raising will help the company in pursuing its inorganic growth strategy by acquiring stressed steel assets in India without stretching its balance sheet. Tata Steel's focus on growth opportunity in India will help the company in realising its vision of doubling capacity within the next five years.
Tata Steel's proposed JV with Thyssenkrupp is expected to deleverage the balance sheet significantly providing a platform to pursue organic and inorganic growth. The right issue of Rs 12,800 crore will further aid the company in minimising any stretch on the balance sheet while focusing on such organic/inorganic growth domestically. We maintain buy rating on the stock with a target price of Rs 785.
KPO phase II expansion was largely anticipated and capex cost is reasonable, but volume growth will be far in the future. The size of potential equity issuance is surprisingly large. While it may reduce gearing and provide headroom to bid for stressed assets, it could be EPS dilutive near term and hence could weigh on stock price. Maintain Underperform.
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