After seeing a 40% increase in share price over the previous six trading sessions, Tata Chemicals Ltd. saw a sharp decline on Monday morning, falling roughly 9% as a result of rumors that Tata Sons is considering alternatives to avoiding an IPO. Kotak Institutional Equities stated that this development should allay expectations regarding value-unlocking at Tata Chemicals.
According to Kotak, its fair valuation for Tata Chemicals is still Rs 780, and it continues to project a roughly two-thirds decline in earnings per share (EPS) for the Tata group firm during FY2023–25E due to declining soda ash margins.
“In our opinion, the recent speculative surge in the stock represents a chance to exit the market,” Kotak said, recommending a “Sell” recommendation for the company.
The stock dropped 8.57% on Monday, reaching a low of Rs 1,202.10 on the BSE. Over the course of the six-day winning run, the scrip was up 39.96%.
According to Kotak, Tata Sons does not appear likely to go public. It is thought to have first asked the RBI for an exemption from the “upper-layer NBFC” regulations, but when that didn’t appear feasible, it looked into other ways to restructure itself in order to get around the restrictions.
“In light of this situation, there is little chance that an IPO will occur. Without an initial public offering (IPO), Tata Chemicals will not be able to extract value from its 2.5% ownership in Tata Sons. In fact, Tata Chemicals has owned the share for almost 25 years and the Tata Group has made no apparent effort to carry out a repurchase. Due to the uncertainty surrounding the stake’s monetization, the stock markets have also given it little to no value throughout the years, according to Kotak.
For these reasons, Kotak believes that the basic valuation of Tata Chemicals’ shares should not include a stake sale; rather, it should only be considered an option.
“Assuming a 100% chance of a Tata Sons IPO, the current market value of all listed investments held by Tata Sons is approximately Rs 16 lakh crore. Assigning a 50% holding company discount (which may be greater) and an additional 20% haircut to account for Tata Chemicals’ impact cost and income tax payable suggests that Tata Chemicals’ stake is worth a maximum of Rs 650 per share.” We would advise taking gains as Tata Chemicals’ share price appears to be almost fully priced in an IPO at the CMP of Rs 1,315, Kotak stated.
“On a separate note, the run-up in share price at Tata Chemicals’ subsidiary Rallis India is even more mystifying: Rallis holds no stake at all in Tata Sons, and if its shares ran up on Thursday in reaction to the appointment of Mr Gyanendra Shukla—the well-regarded former CEO of Monsanto India—as MD, then the reaction seems a week late and, again, disconnected from business trends,” said the statement.
Rallis India’s stock fell 3.96 percent to Rs 276.55.
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