Investors in Tata Steel are cheering its decision to merge seven of its subsidiaries with the company, sending the stock up more than 4% even as the Sensex fell more than 1,000 points, or nearly 2%, on Friday.
Earlier in the day, Tata Steel announced that it will merge seven of its subsidiaries – Tata Steel Long Products, The Tinplate Company of India, Tata Metaliks, TRF, Indian Steel & Wire Products, Tata Steel Mining and S&T Mining.
In response, shares of Tata Steel jumped more than 4% before paring most of its gains as overall market sentiment turned negative.
The merger announcement is in line with the Tata Group’s efforts to consolidate its businesses with joint synergies. Earlier this year, the group announced the merger of Tata Consumer and Tata Coffee. In late 2021, Tata Steel BSL was merged with Tata Steel.
Media reports also suggest that the Tatas might consider merging AirAsia India and Vistara with Air India.
Why is Tata Steel merging its seven metal subsidiaries with itself?
While Tata Steel has given several reasons for the megamerger, the basic reason is that it will improve operational efficiency and the company will benefit from the synergies of better business planning.
“The proposed merger will provide an opportunity to reduce operating costs through the movement of intermediate products between the companies, better order fulfillment, sales synergies and enterprise-wide production planning,” the company said in an exchange filing.
What are the benefits?
Analysts reacted to the news with optimism for the mega merger, with the consensus being that it would result in cost savings – around ₹750-800 crore annually; operational and tax synergies; and a more focused business plan.
“In our view, the merged subsidiaries are also likely to benefit from TSL’s existing client base. In terms of procurement, joint sourcing of key raw materials such as iron ore and limestone would also reduce costs,” said a report by Edelweiss Research.
Analysts at Kotak Securities also sounded bullish on the news.
“The merger is a positive step as it will simplify the corporate structure, prevent the leakage of additional royalties for transfers of iron ore between the companies, reduce the company’s overhead costs, allow different businesses with greater financial flexibility to move forward with growth projects and bring additional operational, purchasing and tax synergies,” said Jatin Damania, Vice President, Fundamental Research, Kotak Securities.
Damania added that Tata Steel will ultimately save an estimated ₹ 750-800 crore annually through the merger. This would help the company meet around 10% of its annual deleveraging target of $1 billion (approximately ₹8,100 crore).
“In our view, the benefits of lower iron ore fees are likely to be immediate, but more strategic ones such as portfolio optimization, a sharpened focus on long products and cross-functional benefits are likely to accrue over time,” Edelweiss’ report added.
Here’s how five listed companies — including Tata Steel — fared financially in FY22:
|Tata Steel||₹1.29 million||₹33,011 crore|
|Tata Steel LP||₹6,801 crore||₹629 crore|
|TRF||₹127 crore||– ₹20 million|
|Tinplate Company||₹ 4.249 crore||₹352 crore|
|Tata Metaliks||₹2,745 crore||₹238 crore|
Source: Company News
Tata Steel is trading lower highs and lower lows on the higher time frame chart. It is trading between a descending wedge pattern on the weekly chart. Above the 115 weekly close, we can see growth towards 130. A weekly close above 130 could be strongly bullish. $TATASTEEL.NSE
— (@pulkitgupta) September 23, 2022