Tata Steel: Stake sale a short-term positive

Last Updated: Mon, Jun 20, 2011 19:52 hrs

Infusion of cash to help company bring down debt/equity ratio to 0.7x in FY12.

Last week, Tata Steel divested its 26.27 per cent stake in Riversdale Mining in an open offer by Rio Tinto, for approximately A$1,060 million (Rs 5,000 crore). However, the company will continue to hold its 35 per cent stake in the Benga project in Mozambique, the rest being held by Riversdale. The sale amounts to Rs 51 per share of Tata Steel, as against the market’s estimated value of Rs 43 per share on a fully diluted basis.

While this divestment is not in line with Tata Steel’s long-term objective to reduce the impact of raw material price volatility and achieve supply security for Tata Steel Europe, in the absence of any agreement with Rio Tinto, this was necessary.

The stake sale will act as a positive for the company, as it eases off the debt/equity ratio of the company. The additional cash will also help fund its other projects, as the company has a capital expenditure of Rs 21,000 crore lined up over next two years.

According to Edelweiss Capital, the Riversdale stake sale by Tata Steel is a positive, as it provides the cash up-front and avoids the need to participate in further investment in Riversdale. Further, with the predominant shareholding by Rio Tinto the effective control and rights with Tata Steel would have been minimal in the event Tata Steel had continued to hold stake.

Despite the sale, the stake and sourcing arrangement in the Benga project remains intact. Tata Steel will continue to hold 35 per cent equity, along with 40 per cent coal offtake for Tata Steel Europe. The stake in Benga would see Tata Steel Europe continue to see a steady supply of coking coal for its European operations once the project commences production.

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