MOSL: TATA CHEMICALS (Buy)-Restructuring could be win-win for all-Expect value unlocking for TTCH’s shareholders

TATA CHEMICALS: Restructuring could be win-win for all; Expect value unlocking for TTCH’s shareholders

(TTCH IN, Mkt Cap USD2.8b, CMP INR705, TP INR959, 36% Upside, Buy)

• Media reports indicate that the Tata group is evaluating the separation of Tata Chemicals' (TTCH) salt and branded lentils businesses and merging them into Tata Global Beverages (TBGL). The group is also considering the merger of Tata Coffee (TCO), which owns coffee plantations and tea gardens, with TGBL.
• While there is no certainty on if and when the aforementioned strategy would be executed, we have evaluated the possibilities of execution of such a strategy and the effect it could have on the existing shareholders of TTCH as per current scenario.

 Expected deal scenario: Equity swap or part-cash-part equity transaction

We believe that the speculated deal would either be a complete equity swap or a part-cash-part-equity transaction. We value TTCH’s consumer business at 22x FY18 EBITDA (~30% premium to its trading EV/EBITDA), and TCO at 15x FY18 EBITDA (~15% premium to its trading EV/EBITDA). For an equity swap, we estimate that TGBL would have to issue 320.9m shares for TTCH’s consumer business and 146.7m shares for TCO. However, for a ‘50% equity - 50% cash’ deal, the additional shares to be issued would be 160.5m for TTCH’s consumer business and 73.3m for TCO. Additionally, for ‘50% equity - 50% cash’ deal, TGBL would have to raise debt of INR43.4b for TTCH’s consumer business and INR19.8b for TCO.