Tata Steel Ltd on Friday sold shares worth $376 million (Rs.2,500 crore) in Tata Motors Ltd, the country’s largest automaker by revenue, as part of an unwinding of its extensive cross-holdings and reducing debt on its books.
Tata Steel sold 38,520,801 shares of Tata Motors to undisclosed institutional investors on the stock exchange for a total consideration of Rs.1,250.69 crore, the company said in a filing to the BSE.
These shares were offered at Rs.324.68 apiece.
Separately, Tata Steel sold 37,878,787 ordinary shares of Tata Motors in an off-market transaction to Tata Sons Ltd at a price of Rs.330 per share, aggregating Rs.1,249.99 crore.
Tata Sons is the promoter of major operating Tata companies and holds significant stakes in them.
Tata Steel lost 0.72% to close at Rs.228.55 per share on the BSE, while the benchmark index, the Sensex, gained 0.98% to close at 26,218.91 points.
Tata Motors Ltd lost 2.81% to close at Rs.328.40 per share.
Tata Steel, India’s second largest private steel maker, has a total consolidated debt of Rs.80,701.29 crore as on 31 March 2015.
Friday’s transaction comes at a time when Tata Sons, as the holding company, is intending to consolidate its ownership of operating firms. Also, the extensive cross-holdings of Tata group companies in each other are coming to the rescue of firms such as Tata Steel and Tata Motors.
Tata Sons is stepping in to buy these stakes.
In August, Tata Sons said it would acquire a 2.18% stake in Titan Industries Ltd, held by Tata Steel, for around Rs.680 crore.
The group has done this at least once in the past. In 2009, Tata Motors sold a 1.5% stake in Tata Steel to Tata Sons and another group company for around Rs.457 crore.
“Basically, Tata Steel is in the process of repairing its balance sheet, and in turn generating cash by selling assets,” said Deven Choksey, group managing director, KRChoksey Investment Managers Pvt. Ltd.
“Tata group did try to manage some of the inter-company asset sales through Tata Sons earlier, and the current sale transaction appears to be in excess of what they could absorb,” added Choksey.
In August, Tata Steel received shareholders’ nod to raise up to Rs.10,000 crore to meet capital requirements. Last month, Tata Steel group executive director (finance and corporate) Koushik Chatterjee said the company in the last 5-6 years has raised around Rs.15,000 crore through the monetization of strategic, non-core and listed assets.
The company acquired its European assets as part of the $12.9 billion takeover of Anglo-Dutch steelmaker Corus Group Plc. in 2007.
Tata Steel is in the process of restructuring its UK unit Tata Steel Europe. Adverse currency movements and Chinese imports may force the company to undertake further asset right-sizing, Cyrus Mistry, chairman, Tata Steel, said in the company’s latest annual report.
Mistry added that the global economy continues to be fragile and uncertain, especially with regard to the impact of the Chinese slowdown and the euro zone crisis.
Tata Steel is also looking to start commercial operations at its ambitious Rs.25,000 crore Kalinganagar integrated steel project in Odisha in the second half of the current financial year.
Experts are expecting similar deals in the future as equity markets have dried up.
“The company is focusing on raising funds through off-market transactions like this as well as selling non-core assets. The company requires funds to fuel capex and also retire debt,” said Goutam Chakraborty, metal analyst at Emkay Global Financial Services Ltd.
In 2014-15, the company spent Rs.13,492 crore on capital expenditure, a large part of which was towards the three million tonne Kalinganagar project.
A few analysts are of the opinion that sale of the stake by Tata Steel to the parent company indicates the level of confidence in the automaker.
“The stake sale has eventually resulted in shares moving out of Tata Steel to Tata Sons, and it signals the confidence that the Tata group has in Tata Motors’ business. It feels the business is attractively valued, which is why it committed to buy 50% of the sale,” said Ajay Bodke, chief executive officer and chief portfolio manager, portfolio management services, Prabhudas Lilladher Pvt. Ltd.
“In the case of Tata Steel, since the steel industry is facing challenging times due to global headwinds and massive erosion in global steel prices over the past year because of the slowdown in China, I think right-sizing of the balance sheet is the need of the hour,” added Bodke.