‘Demerger of consumer arm to be positive for Tata Chem’

MUMBAI: The demerger of the consumer products segment is an incremental positive for Tata Chemicals (TCL) because it unlocks hidden value of Tata Salt in a tax-efficient manner and without creating any cross-holdings, analysts said. Post demerger, TCL’s chemicals business is available at an attractive price with a medium term upside of nearly 15%, according analysts.

TCL’s Consumer Products segment will be demerged into Tata Global Beverages (TGBL), which will be renamed ‘Tata Consumer Products’. TCL’s shareholders will receive 1.14 shares of TGBL for every share held in TCL, implying a transaction value of Rs 5800. TCL will retain the salt manufacturing operations, which will continue to supply salt to TGBL. TCL will now be fully focussed on the chemicals business – both basic and specialty.

“The residual business of TCL is currently being valued by the market at Rs 330 per share compared to its fair valuation of Rs 500 per share, while the management for the first time demonstrated a willingness to consider monetising crossholdings, which could add about Rs 400 per share” said Abhijit Akella, analyst, IIFL. “Since TCL’s shareholders will directly receive TGBL shares worth Rs 230 for every share they hold in TCL, there are no cross-holdings created between TCL and TGBL”.

Shares of Tata Chemicals gained 2.57% to Rs 619.10 on Friday. The deal values the branded consumer business of Tata Chemicals at 18 times its FY 2019 EBITDA.

“As per the EV at which the consumer business has been acquired, its contribution to TCLs current market price comes out to be Rs 226 per share,” said Sumant Kumar, analyst, Motilal Oswal Securities’. “We arrive at a target price of Rs 700 with an implied EV/ EBITDA (FY21) of 8.2x”.

Analysts expect the stock to trade at a proxy to 1.14 times TGBL shares plus the value of chemicals business and cross-holdings.

“Our reverse valuation exercise at current market price implies TCL’s chemicals business is now available at an attractive 5 times FY 2020 estimated EBITDA, adjusted for value ascribed to the consumer segment through 1.14 times TGBL shares and value of crossholdings, including Titan, at 20% holding company discount” said Tarun Lakhotia, analyst, Kotak Securities. “An improving outlook on soda ash cycle and gradual progress on expansion projects will drive earnings growth in the medium term”.