Daily Brief India: Tata Motors DVR, Tata Steel Ltd and more

• Tata Motors Ltd (TTMT IN) has announced a Scheme of Arrangement where all the Tata Motors DVR (TTMT/A IN) shares will be cancelled.
• For every 10 shares of Tata Motors DVR (TTMT/A IN) held, shareholders will receive 7 shares of Tata Motors Ltd (TTMT IN). 
• The process is expected to take 12-15 months to complete and there will be passive buying in Tata Motors Ltd (TTMT IN) at the end of it.

Tata Steel’s Q1/23-24 results were weaker than expected, as the European business dragged down profitability. On a standalone basis, Tata Steel India performed well, registering a strong EBITDA margin (c. 22%) which was slightly better than that of JSW Steel. However, the EBITDA loss in the European business, particularly the UK business, affected profitability. The company’s financial risk profile deteriorated, with Net Debt/EBITDA increasing to higher than management’s guided range. Liquidity remains sound. However, management is committed to deleveraging its balance sheet and aims for Net Debt/EBITDA to be 2-2.5x by FYE 2023-24.

Tata Steel India’s business remained solid. Compared to its closest peer, JSW Steel, Tata Steel India is 100% self-sufficient in terms of iron ores with huge reserves (500-550 mn tonnes), and 30% in terms of coking coal. It also has a lower dependence on exports (which is pressured by increasing Chinese exports), with exports typically accounting for c. 10-15% of sales (vs. 25-30% for JSW Steel).

The group’s future will depend on the decisive action that management takes towards the UK business, which is highly uncompetitive, mainly due to: [1] increased energy costs in the UK; and [2] high capex required for a green transition. Energy costs in the country were already twice those in Europe before the Russia-Ukraine war, and are now at elevated levels. Plants in the region are also reaching end-of-life, and production levels have hence become less stable (with unplanned outages). Any long-term solution for the UK business must address rising carbon costs and local emissions reduction goals. Tata Steel UK has asked the government to subsidise 50% of capex for its green transition. Management said it will continue to run Tata Steel UK optimally for cash, with minimal support from Tata Steel in India.