Tata Steel: No big bottomline boost

The NatSteel buy adds 36% to Tata Steel's sales

Tata Steel is buying NatSteel's steel division for a cash consideration of approximately Singapore $466 million or Rs 1,260 crore. This division did sales of Singapore $1,416 million in the year ended December 2003, which means Tata Steel has paid just 0.33 times trailing sales. The markets welcomed this move by pushing up the scrip around 3.5 per cent on Monday, although the broad markets were flat.

However, NatSteel's steel division made an operating PBT of just Singapore $46.8 million, and on a price-earnings basis, the valuation works out to around 10 times. Natsteel's operating PBT margin works to just 3.3 per cent, compared to 25 per cent for Tata Steel.

Thus, while the acquisition will add 36 per cent to Tata Steel's topline, it adds less than 5 per cent to its bottomline. The Tatas would have to improve efficiencies considerably for the acquisition to impact its bottomline significantly. Analysts say that its captive iron ore supply will help lower costs for the Natsteel division.

Moreover, the low profit margin currently is not a big concern as significant synergies accrue to Tata Steel. First, it would have access to additional steel capacity of approximately 3.2 million tonne in the booming construction segment of the Asia Pacific region.

Also, NatSteel has steel manufacturing operations in five Asian countries including China, Singapore and Vietnam which are in proximity to the ports of the west coast of America. Lower transportation costs would be an added incentive for Tata Steel to expand in the key American market.

Oil sector mergers

The proposed consolidation in the oil sector - BPCL and HPCL with ONGC and OIL with IOC - will reportedly result in a saving of Rs 25,000 crore over three to four years. The number may be a little exaggerated, but since the mergers would result in the creation of vertically integrated companies, there would be considerable savings.

These will primarily come from better logistics management, whereby depots can be shared and optimally used and therefore inventories can be better controlled. Most important, the balance sheet of a behemoth comprising HPCL, BPCL and ONGC will become stronger, with the cushioning needed to withstand oil price shocks.

Further, refining and marketing companies currently are not allowed to raise retail prices, which coupled with the under-recoveries on account of subsidies for LPG and kerosene, puts pressure on profit margins. Any improvement in efficiencies as a result of the mergers would obviously help.

Today BPCL is the more savvy marketer while HPCL has more modern refining capacities. Together they control approximately half the retail outlet network in the country and should be a formidable player ready to take on the competition emerging in the form of Reliance, Shell and Essar.

IOC controls the other half of the network. So, if the mergers happen, we are looking at five players which should allow enough competition to benefit the consumer, once pricing is freed.

NIIT

NIIT Ltd listed in its new avatar on Monday, and ended the day's trading session at Rs 160. NIIT Ltd is now left with only the software education business, after the software services business was demerged to form NIIT Technologies.

In FY04, NIIT Ltd had an EPS of Rs 9.8, based on which the stock gets a discounting of 16.4. But FY04 represented a rather low base, as operating margin was just 7 per cent. Performance has picked up this year - in the June quarter, operating margin stood at 13 per cent. Importantly, EPS in the June quarter was Rs 5.6, about 58 per cent of the EPS for the whole of FY04.

For an investor who held, say 100 shares in NIIT Ltd prior to the demerger, his holding had a value of Rs 16290 on last count, before the NIIT Ltd scrip got temporarily delisted. He's now left with 50 shares of NIIT Ltd and 75 shares of NIIT Technologies.

The NIIT Ltd holding has a value of Rs 8000, based on Monday's closing price of Rs 160. Analysts expect the NIIT Technologies scrip to open at anywhere between Rs 90 and Rs 120 (between 10 and 14 times FY04 earnings), which would take the total value of the holding to between Rs 15000 and Rs 17,000.

Even at the higher end of mentioned band, the return since July 8, when the combined NIIT scrip was delisted, is just 4.4 per cent. The CNX IT index has, however, risen 9 per cent in that period.

Unless the NIIT Technologies trades at over Rs 130 per share, the demerger wouldn't have unlocked value for investors.

With contributions from Amriteshwar Mathur, Shobhana Subramanian and Mobis Philipose