Tata Sons IPO: Tata Chemicals shares plunge 9% after 6-day rally; Sell, exit stock, says Kotak

Tata Chemicals Ltd, whose shares surged 40 per cent in the previous six trading sessions, took a beating on Monday morning, falling about 9 per cent amid reports Tata Sons is evaluating options to avoid an initial public offer (IPO), which Kotak Institutional Equities said should deflate speculation around value-unlocking at Tata Chemicals.

Kotak said its fair value for Tata Chemicals remains at Rs 780, and that it continues to expect earnings per share (EPS) for the Tata group company to fall by about two-thirds over FY2023-25E amid falling margins on soda ash.

“The recent speculative flare-up in the stock should be considered an exit opportunity, in our view,” Kotak said while suggesting a ‘Sell’ rating on the stock.

On Monday, the stock fell 8.57 per cent to hit a low of Rs 1,202.10 on BSE. The scrip was up 39.96 per cent in the six-day winning streak.

Tata Sons does not seem inclined to go public, Kotak said. It is believed to have first approached the RBI for an exemption from the ‘upper-layer NBFC’ rules, and when that seemed unlikely, it moved on to consider various options to reorganize itself to sidestep the rules.

“Given this scenario, the probability of an IPO should be considered low. In the absence of an IPO, there is no clear or easy path for Tata Chemicals to unlock value from its 2.5 per cent stake in Tata Sons. Indeed, Tata Chemicals has held the stake for more than 25 years without any visible attempt by the Tata Group to execute a buyback. The equity markets, too, assigned little or no value to the stake all these years, given the lack of clarity around its monetization,” Kotak said.

For these reasons, Kotak thinks a stake sale should be treated only as an optionality rather than as part of the core valuation of Tata Chemicals’ stock.

“The current market value of all listed investments held by Tata Sons is around Rs 16 lakh crore, and assigning a 50 per cent holding company discount (could be greater) and a further 20 per cent haircut to factor in the impact cost for Tata Chemicals and income tax payable suggests that Tata Chemicals’ stake is worth a maximum of Rs 650 per share (assuming a 100 per cent probability of a Tata Sons IPO). At the CMP of Rs 1,315, Tata Chemicals’ share price seems close to fully pricing in an IPO, and so we would recommend taking profits,” Kotak said.

“On a separate note, the run-up in share price at Tata Chemicals’ subsidiary Rallis India is even more mystifying: Rallis holds no stake at all in Tata Sons, and if its shares ran up on Thursday in reaction to the appointment of Mr Gyanendra Shukla—the well-regarded former CEO of Monsanto India—as MD, then the reaction seems a week late and, again, disconnected from business trends,” it said.

Shares of Rallis India were down 3.96 per cent to Rs 276.55.