Mumbai: Tata Sons may have one less Group Company to worry about. Tata Steel’s share price has nearly doubled from the lows of 2013 & its current market capitalization of Rs 51,000 cr is within striking range of its consolidated net debt of Rs 66,500 cr as of end-March.
This has increased the prospects of Tata Steel utilizing the rally to increase fresh capital & cut its dependence on Tata Sons which would permit the latter to give more support to other companies like Tata Power, Tata Teleservices, Tata Telecommunications, besides loss making ventures like Infiniti Retail, Tata Sky & Tata Capital.
Tata Sons has for a little over 5 years been an investor of last resort for Tata Steel. It has combined fresh equity worth nearly Rs 3,000 cr in the company in 3 tranches, starting with a warrant conversion in 2007. All these were at a premium to the prevailing share price. Such as, in January 2012, Tata Steel allocated 12 million stocks to Tata Sons at Rs 594 a share on conversion of warrants, when the stock price was Rs 436. In all, the company has increased fresh equity capital worth Rs 6,461 cr since 2007, via 4 issues.
“The latest rally in the share price signals a strong investor confidence in the company. They (Tata Steel) are certainly in a position to go for external sources such as overseas banks with a refinancing proposal,” said Giriraj Daga, senior analyst with Nirmal Bang Securities.
The company previously increased equity from non-promoter investors in January 2011, taking advantage of the post-Lehman crisis rally. At the time, its market capitalisation was nearly Rs 60,000 cr, highest since the Corus acquisition. The company increased around Rs 3,500 cr through a follow-on offer to domestic and foreign investors, to fund extension of its Jamshedpur plant.
There are reports that Tata Steel is in talks with banks for a $3-billion loan to refinance a part of its debt it raised in the past to fund the Corus (now Tata Steel) acquisition. The company refused to comment on the news.
As on March 31, the consolidated net debt was Rs 66,500 cr, still higher than its current market capitalisation but as good as in the past. For most of 2012 & 2013, the market value was a fraction of total debt, making it nearly impossible to increase equity from outside sources (see chart).
“When Tata Steel earlier increased money from its promoter, it was desperate as it needed funds but its share price was not high enough for it to get external funding at reasonable cost,” said an expert with a local brokerage. “External equity funding becomes attractive only when the share cost is high, translating into low equity dilution.”
This problem is related to the role Tata Sons played as a promoter until Tata Motors obtained on its feet after the turnaround in the fortunes of Jaguar Land Rover.
Tata Motors’ rights issue to fund the JLR exchange in 2008 was under-subscribed & Tata Sons selected up the complete unsubscribed portion.
After a turnaround in JLR and a rally in Tata Motors’ share price, the company has repeatedly increased equity from the market, through convertible bonds & qualified institutional placements.
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