Friday, February 16, 2018

Tata Steel Rights Issue & Valuations

Tata Steel  has fixed February 1,2018 as the record date for the right issue and the issue will be open until February 28,2018. The issue comprises 15,53,94,550 crore fully paid-up ordinary shares not exceeding Rs 8,000 crore at Rs 510 per scrip, and up to 7,76,97,280 crore partly paid-up ordinary shares not exceeding Rs 4,800 crore at Rs 615. 
Fund Application : Tata steel  has an expansion plan with capex of Rs 235 bn over four years, which it can fund with existing cash flows, a rights issue and some debt. As many distressed steel assets that are up for sale, it may also bid for it. If it doesn't bid, it may see its domestic or global rivals gobble them up and grow their share in the Indian market. With an improved outlook for steel has helped Tata Steel's performance improvement , But an aggressive bid to grow inorganically could again land the company in balance sheet troubles..
Valuations :
At the current price of Rs 688, Tata Steel is fairly priced at 1.25 times of estimated FY20 book value. So, If you do not own the stock consider buying it only at lower levels.
At the offer price of Rs 510 for the fully paid shares, the stock offers CAGR of over 15% per annum over next 2 to 3 years. So, if you  are eligible to participate in the rights issue to apply for the fully paid up shares.
At the offer price of Rs 615 for the partly paid shares, the compounded returns are not attractive even over a period of 2 to 3 years. Hence it is better to avoid this offering.

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