TGB-Tata Chemicals deal is good news for stocks, say analysts

The move to merge their consumer businesses will unlock opportunity for both companies and may potentially result in an upside of 50% for Tata Chemicals

The Street welcomed the Tata group’s strategic decision to put the long-awaited consumer business under one roof, by merging Tata Chemicals’ (TCL) foods and detergent business with Tata Global Beverages (TGBL; to be renamed as Tata Consumer Products). 

Shares of these two entities surged 8-11 per cent on Thursday. The expected valuation and growth upside from this deal has enthused investors, given these two entities (before deal announcement) have relatively subdued valuation at present.

A close look at the revised valuation matrix of TCL shows that the valuation of its non-consumer businesses indicates 52 per cent upside in the stock. 

According to analysts at IIFL, valuation of TCL’s residual business (excluding the consumer business), stands at Rs 500 per share on an SOTP (sum of the parts) basis, while the share-swap ratio of the deal indicates a value of Rs 330 per share (after knocking off Rs 227 that TCL shareholders will get in the form of TGBL shares). 

Besides, the TCL management’s willingness to monetise cross-holding investments will further unlock valuation opportunities for TCL, say analysts.

TCL expects to grow its speciality chemicals business aggressively after the merger, which will add to long-term growth prospects. TCL’s return on capital employed, however, could see some impact after the consolidation of the consumer business, the above quoted analysts added.

In case of TGBL, muted performance of its international business and matured portfolio (tea) have led to lower valuation (26 times the FY20 estimated earnings, against 40-50 times in case of other FMCG majors). 

However, the deal seems to be in line with TGBL’s action of reducing dependence on international businesses and exiting loss-making segments, and focussing on its Indian operations. Analysts say there will be significant growth and a re-rating upside for TGBL.

TCL’s consumer business will add 25 per cent to TGBL’s FY19 revenues and 159 basis points to earnings before interest and tax margin. 

Cost and distribution synergies expected from the deal will fuel overall earnings, despite a 46 per cent increase in TGBL’s equity. Analysts foresee around 10 per cent accretion to TGBL’s FY21 earnings. 

“The company could use cost benefits expected from this deal to expand its portfolio and strengthen brand positioning,” says Sanjay Manyal, analyst at ICICI Securities, who also believes this deal will provide impetus to TGBL’s valuation.

Overall, analysts believe that the valuation offered for TCL’s consumer business is in line with expectations, and the deal is a win-win for both entities.