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In a report to its institutional clients, CLSA says the FY15 earnings of Tata Steel could see a 30-150 per cent jump, depending on which Corus assets are sold, while equity value could rise by $1.5-3.1 billion or Rs 85-180 a share for Tata Steel.
The report further says finding a buyer is obviously the crucial part and will not be easy, but the change in management stance is definitely a positive.
"We sense a change in Tata Steel's thought process in recent months and there is now a much stronger focus on asset sales than in the past. The aim here is to deleverage the balance sheet and rid the portfolio of assets with questionable outlook (including Corus). We see this change as a positive and if successful, can achieve a big reduction in risk profile with large earnings and value accretion," the report says.
Corus' Ijmuiden plant in the Netherlands should attract higher valuations than the UK plants, given its better layout, superior product-mix and lower cost structure.
Comparing it with ArcelorMittal's plants which trade at an enterprise value per tonne (EV/t) of $422 (Rs 22,770) on total capacity and $600 on operational capacity, CLSA says it believes the Ijmuiden plant can get an EV/t valuation of $500-600 implying an equity value of $4 billion and assuming a debt-free sale.
"The UK plants are barely profitable at Ebitda (earnings before interest, taxes, depreciation and amortisation)-level and might remain so for some time, given inefficient layout and high fixed cost structure. We believe the UK units might get an EV/t valuation of barely $100-200, which is 50-75 per cent discount to Arcelor," it says.
Panting three scenarios, CLSA says Tata Steel can go ahead with the sale of UK plants at $150 EV/tonnes, which will boost FY15 earnings per share (EPS) by 88 per cent to Rs53.9 and target price by Rs86/share to Rs397. Secondly, Tata Steel can sell only the Ijmuiden plant at $550 EV a tonne.
"This will boost FY15 EPS by 32 per cent to Rs 37.8 and target price by Rs90 a share to Rs 401; and finally sale of both UK and Ijmuiden plants at a blended $310 EV/. This will boost FY15 EPS by 149 per cent to Rs71.2 and target price by Rs181/share to Rs492," it says.
The large increase in EPS is due to the sharp drop in interest and depreciation, which gets magnified by Tata's low net profit margin, it adds. CLSA says this is a theoretical exercise and value accretion can rise if Tata manages to sell Corus at a higher valuation. "While it is difficult to predict the likelihood and timing of such a sale, the sheer possibility of this happening might provide a higher support to the stock price than otherwise in 2013."
In 2007, Tata Steel had taken over Corus for close to $12 billion in an all-cash transaction. Though the takeover catapulted Tata Steel to one of top five steel companies, the return on investment in Corus has not been good.
On Monday, Tata Steel scrip closed at Rs 361 a share, down one per cent as compared to its previous close.
