Kotak Institutional Equities has an add recommendation on Tata Global Beverages (TGBL) with a target price of Rs 240.

The brokerage has given this recommendation after TGBL and Tata Chemicals (TCL) have entered into an agreement to merge TCL’s consumer products business into TGBL.

The transaction would be an all-stock one with a share swap ratio of 1.14:1 – TCL shareholders to get 1.14 shares of TGBL for each TCL share held.

Shares of Tata Global Beverages traded at Rs 215.3 around 11:45 am on 16 May, 2019. The brokerage has set a one-year horizon for the stock to hit the target price.

“Our calculations suggests a meaningful earnings-per-share (EPS) accretion of 3-6 per cent for TGBL in the second and third years after the consummation of the merger, even without assuming any synergy gains,” the brokerage said.

The brokerage added that TGBL, which will be renamed Tata Consumer Products, will become the vehicle to execute Tata Group’s aggressive aspirations in the business-to-consumer (B2C) FMCG business which may include home care and personal care at some point.

Tata Salt is the largest part of TCL’s consumer products business (CPB) portfolio with other key and emerging segments being pulses, spices, ready-to-eat mixed and other nutrition products and the company has been aggressively expanding this portfolio in the last few years with good success on select channels.

The brokerage pointed out that the merger would lead to issuance of around 28.9 crore fresh equity shares of TGBL, which means a 46 per cent dilution. Even as this is not the most scientific way of assessing the deal valuations, at TGBL’s current market price of Rs 199 per share, the value of the acquired portfolio works out to around Rs 5,750 crore, implying a trailing EV/Ebitda multiple of 18.2 times.

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“FY20E EV/Ebitda multiple, basis our TCL analyst’s Ebitda estimate for the CPB business, works out to 15.6 times, reasonable in our view,” the brokerage said.

TGBL would only be acquiring working capital pertaining to the acquired business while TCL would continue to manufacture the products under the current inter-segment pricing arrangement. The company expects the transaction to close by Q4FY20 or Q1FY21.

“Our calculations, without assuming any revenue or cost synergies, suggests that the transaction would be EPS-neutral for TGBL in the first year (FY21E) and accretive to the extent of 6 per cent by FY23E,” said the brokerage.

This optionality has value; we do not bake in the same yet, the brokerage added.



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