The Economic Times daily newspaper is available online now.

    Merger of Tata Chemicals & Tata Global Beverages to help Tatas focus on consumer vertical

    Synopsis

    According to analysts, the salt business of Tata Chemicals has been growing in low single digit for the past several years.

    1
    While the valuation for the consumer business appears fair, analysts believe that the residual business of Tata Chemicals is a mere commodity chemicals business.
    The merger of Tata Chemicals’ consumer business, which mainly includes the salt segment, with Tata Global Beverages will help the Tata group to focus on the consumer vertical, where its presence as a group has been limited.

    However, given long term nature of synergies of the merger, the deal does not offer any immediate trigger for a rerating of the stocks. While there would be 2-3% cost synergies over the next 18 to 24 months according to the management, the combined consumer entity has been struggling to grow across business categories.

    Empower Your Corporate Journey with Strategic Skill Courses

    Offering CollegeCourseWebsite
    Indian School of BusinessISB Leadership in AIVisit
    IIM LucknowIIML Chief Executive Officer ProgrammeVisit
    Indian School of BusinessISB Chief Technology OfficerVisit
    For instance, Tata Global Beverages’ revenue for the past five years has declined due to divestment of its less lucrative businesses. Tata Global Beverages mainly includes tea and coffee businesses.

    According to analysts, the salt business of Tata Chemicals has been growing in low single digit for the past several years. The company’s packaged spices and pulses business is relatively new and is yet to show major growth momentum. The only positive factor about the salt business is its high margin.

    The EBIT (Earnings before interest tax) margin of Tata Chemical’s consumer business was 17% in FY19 compared with 9.1% margin of Tata Global Beverages. The combined entity which will be called Tata Consumer Products will have a combined margin of 10.7%. A higher margin would lead to better cashflows which over a period of time may help the company to look at inorganic growth through acquisition.

    On the valuation front, Tata Chemicals’ investors may be disappointed. The swap ratio implies that they will receive 114 shares of Tata Global Beverages for every 100 shares held, thus valuing the consumer business at Rs 227 per share.

    On Wednesday, Tata Global Beverages stock closed at Rs 199.5 and Tata Chemicals’ stock closed at Rs 556.8. While the valuation for the consumer business appears fair, analysts believe that the residual business of Tata Chemicals is a mere commodity chemicals business. Hence, it does not justify the remaining value of Rs 330 after taking out the salt segment.


    (You can now subscribe to our Economic Times WhatsApp channel)
    (Catch all the Business News, Breaking News, Budget 2024 News, Budget 2024 Live Coverage, Events and Latest News Updates on The Economic Times.)

    Download The Economic Times News App to get Daily Market Updates & Live Business News.

    Subscribe to The Economic Times Prime and read the ET ePaper online.

    ...more

    (You can now subscribe to our Economic Times WhatsApp channel)
    (Catch all the Business News, Breaking News, Budget 2024 News, Budget 2024 Live Coverage, Events and Latest News Updates on The Economic Times.)

    Download The Economic Times News App to get Daily Market Updates & Live Business News.

    Subscribe to The Economic Times Prime and read the ET ePaper online.

    ...more
    The Economic Times

    Stories you might be interested in