Tata Steel capitalised on the Federal Reserve’s overnight decision to keep US interest rates unchanged by bringing to market a Rs25 billion ($376 million) block trade of Tata Motors shares before the market opened on Friday.
Within three hours of the Fed announcement, Tata Steel made its move to cash in on some of its non-core assets by launching an accelerated bookbuild of Tata Motor shares in two tranches.
India is seen as vulnerable to any US rate rise because of the potential for portfolio capital outflows from emerging markets as investors reallocate funds to US markets. So Fed chairwoman Janet Yellen’s no-hike decision gave Indian markets some relief on Friday, adding 1% to the Sensex stock index by the close and shaving 4 basis points off 10-year Indian government bond yields.
A source familiar with the Tata Motors transaction confirmed that the book opened at the unusual hours of 3:00am local time because the company wanted to wait for the Fed decision before deciding on the launch. It could not have been started much earlier also because Tata Motors’s American Depositary Receipts traded until 1:30am Mumbai time.
The deal comprised a $188 million public tranche to institutional investors and a private tranche of the same size to Tata Sons, the de facto holding company of Tata Group.
In the public tranche the Tata Motors shares were offered at Rs324.50 – Rs338.05. The final price was settled at the lowest end of that range and represented a 4% discount to the last close at Rs338.05.
A total of 77 million shares were offloaded in both tranches, representing 2.66% of Tata Motors’s share capital.
Citigroup was the sole bookrunner of the transaction.
Hedge fund interest
Many hedge funds saw the Tata Motors block as an opportunistic trade and will be happy given that the stock ended down 2.3% on Friday, which means investors who participated in the block effectively got a 1.7% gain in a single-day trade.
Tata Motors, which manufactures Jaguar Land Rover cars in India, is a very liquid stock and averaged $41 million worth of trade every day over the past month. The size of the public tranche equates to only 4.5 days' trading volume.
For that reason hedge funds were particularly keen to join in the deal. Roughly 70% of the public tranche was taken up by hedge funds, including a large anchor order, while the remainder was split between long-only funds and domestic institutions, said the source familiar with the deal.
Trading at a price-to-earnings ratio of 7.4 times on a forward twelve-month basis, Tata Motors is one of the cheapest auto manufacturers in Asia, although its growth prospects may not be as bright as Japanese peers like Toyota and Mitsubishi Motors, which benefit from a sharply devalued currency.
The Tata Motors block trade forms part of Tata Steel’s broader attempt to monetise its non-core assets so as to reduce its debt-gearing ratio, which stood at 213.7% as of the end of March. In the three-month period to end-June, the steel maker raised Rs10 billion by selling part of its equity portfolio, according to a company statement.
Tata Steel is one of the epicentres of a series of cross share holdings between the publicly-listed entities of Tata Group. The steel unit’s roughly $1 billion-worth of equity holdings include 54.5% of Tata Sponge Iron, 50.9% of Tata Metaliks, and a 74.96% stake in Tinplate Company of India.
Completion of the deal saw Tata Steel lower its stake in Tata Motors to 5.5%, while Tata Sons’s stake increased to 25.7% and remains as the largest shareholder.
Tata Motors shares are down 33% year-to-date, lagging some way behind Sensex’s 4.3% loss over the same period. The company reported lower margins due to new plant expenses and higher marketing spending, while its China business also suffered from challenging economic conditions.
Having sold 300,000 vehicles since the beginning of this year versus a target of around 420,000, it is unlikely that Tata Motors will reach its annual target of 500,000 car sales, Nomura analyst Kapil Singh said in a research note.
In the quarter ending June the automaker reported a profit after tax of Rs27.7 billion, a 49% decline from a year earlier.
JP Morgan analyst Aditya Makharia, though, said current valuations are not demanding, adding that an improving business outlook in India and new product launches will benefit sales in the final months of the year.
