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Tata Steel plans to amalgamate seven group companies with itself

ICICI Securities 30 Sep 2022

Recently, the Tata Steel Board approved the amalgamation of seven group companies with itself. This proposed scheme of amalgamation will lead to a simplified structure. Also, over the medium to long term horizon, this step would enable efficient utilisation of group facilities and optimisation of procurement, logistics costs, etc. The seven group companies, which Tata Steel plans to amalgamate with itself, includes Tata Steel Long Products, Tinplate Company of India, Tata Metaliks, TRF, Indian Steel and Wire Products, Tata Steel Mining and S&T Mining. Each amalgamation is subject to requisite approvals from relevant authorities. Of the above, Tata Steel Long Products, Tata Metaliks, Tinplate Company of India and TRF are listed entities. Under the proposed amalgamation scheme, Tata Steel will issue 67 shares for every 10 shares of Tata Steel Long Products. For Tata Metaliks, Tata Steel will issue 79 shares for every 10 shares of Tata Metaliks. Tata Steel will issue 33 shares for every 10 shares of Tinplate and 17 shares for every 10 shares of TRF.

One of the key benefits of the proposed amalgamation is that it will provide operational integration and better facility utilisation. The amalgamation will provide an opportunity for reduction of operational costs through better order loads through pooling of orders, improved sales and production planning. Also, the proposed amalgamation scheme will nurture maintaining uniform KPI benchmarks including consumption of coke, fuel & power, etc. This is likely to reduce overall cost of production and promote efficiencies. Further, a culture of sharing of best practices and cross-functional learnings will be nurtured, which will promote greater systemic efficiencies over the medium to longer term horizon.

The proposed amalgamation would also lead to centralised procurement and inventory management. Inventory management and sourcing of stores, spares, MRO and services can be managed centrally. This will increase the scale of operations thereby improving negotiating power and reducing sourcing and inventory management cost. The proposed scheme of amalgamation will also ensure improvement in raw material security for companies. Iron ore sourced from the mines of the companies can be blended appropriately, which can enhance the overall life of mines of the combined entities. Also, this step would aid in rationalisation of logistics costs. Consolidation and optimisation of stockyards could reduce logistics and distribution costs for the companies. Clubbing of cargoes is likely to help lower shipping costs, port terminal charges and ocean freight.

Overall, the proposed scheme of amalgamation has been undertaken to realise better synergies of business of the entities involved in the scheme. The proposed scheme is expected to lead to operational integration and better facility utilisation, rationalisation of logistics costs, simplified structure etc. The amalgamation is anticipated to result in utilisation of each other’s facilities in a more efficient manner. There also can be collaboration on marketing and distribution network of entities. Overall, with the proposed amalgamation, the resources of the merged entities can be pooled to unlock the opportunity to create shareholder value.

Once the scheme of amalgamation receives all the requisite approvals from the relevant authorities, over the medium to longer term horizon, it will aid Tata Steel to drive operational synergies across its whole value chain. Once the scheme is approved, in addition to the synergy related benefits, the proposed amalgamation will also help in reducing higher royalties paid by some of its subsidiaries (such as Tata Steel Long products, Tata Metaliks) on iron ore sourcing. Also, some subsidiaries have net cash balance sheet (Tata Metaliks and Tinplate) and strong cash flow, which would be a favourable addition for Tata Steel.

Disclaimer: ICICI Securities Ltd. ( I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. - ICICI Venture House, Appasaheb Marathe Marg, Prabhadevi, Mumbai - 400 025, India, Tel No : 022 - 6807 7100. I-Sec is a SEBI registered with SEBI as a Research Analyst vide registration no. INH000000990. The contents herein above shall not be considered as an invitation or persuasion to trade or invest.  I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon. Investments in securities market are subject to market risks, read all the related documents carefully before investing. The non-broking products / services like Research, etc. are not exchange traded products / services and all disputes with respect to such activities would not have access to Exchange investor redressal or Arbitration mechanism.

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