Debt and equity binge to erode Tata Steel's EPS
A more-than-expected equity dilution and a consequent drop in earnings per share (EPS) could see shares of Tata Steel drop in the coming days, reports Vyas Mohan.business Updated: Apr 18, 2007 19:25 IST
A more-than-expected equity dilution and a consequent drop in earnings per share (EPS) could see shares of Tata Steel drop in the coming days. Analysts are of the view that an equity dilution of around 40 to 45 per cent and a similar drop in EPS could hammer the stock about 10 per cent more from the current levels.
“We have no recommendations on the stock. But we think there could be a further fall of 10 per cent from the current levels. In the short term, it is negative for investors,” said Hitesh Agrawal, an analyst tracking metals for Angel Broking.
However, Tata Steel’s decision to limit debt to 12 per cent of the $4.1 billion it plans to raise to fund the acquisition of Anglo-Dutch Corus Group could be good for the company in the long term as it would help avoid prolonged interest expenses.
Further, dilution of equity gives the company the chance for higher leverage by enabling more borrowings. Though Tata Steel officials have said internal accruals of the company will be sufficient to finance expansion plans, brokers believe the move is towards raising funds through debt.
“Tata Steel is planning big capital expenditure, which would require funds. A higher equity base enables them to raise huge funds,” said a BSE broker.
After market hours on Tuesday, Tata Steel had announced it would raise $4.1 billion to fund the Corus deal, of which 12 per cent would come via debt and the rest through equity.
Shares of Tata Steel ended 3.27 per cent lower on Wednesday at Rs 511.35 on the BSE, after hitting an intra-day low of Rs 496.35.