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Tata Steel's stock fell three per cent on Tuesday following a recommendation by global brokerage firm CLSA to institutional clients to sell it with a price target of Rs 310 in 12 months. Tata Steel closed the day at Rs 350 a share.
The stock is down 19 per cent since January 1, as its European operations continue to face weak demand and a substantial amount of the company's cash is going towards repayment of debt taken to finance its $12-billion acquisition of Corus in 2007.
CLSA said Tata Steel will have to sell either all or part of Corus to help it to retire its debt and improve earnings. In a report dated yesterday, it said FY15 earnings could see a 30-150 per cent jump, depending on which Corus assets were sold, while equity value could rise by $1.5-3.1 billion.
"Finding a buyer is obviously the crucial part here and will not be easy but the change in management stance is definitely a positive," the report said. It said there was a change in Tata Steel's thought process in recent months, with a much stronger focus on asset sales.
"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," it says.
When asked, a Tata Steel spokesperson said Corus or any of the European factories were not for sale and the CLSA report was speculation. "An analyst report published without discussing with the company doesn't add any credence to the speculation. Further, the analyst has clearly mentioned in his report that it is a theoretical exercise. Therefore, our stand on the issue remains the same and it remains speculative and unsubstantiated information," the spokesperson said.
Analysts are expecting this to go up to Rs 60,000 crore in FY14 and Rs 63,000 crore by FY15. At the same time, analysts are expecting the consolidated earnings before interest, tax, depreciation and amortisation (Ebitda) to fall in the coming years. The European operations have been affected by the weak economic environment there, reflected in significantly lower profitability in the third quarter performance, as it reported a lower profit of Rs 1,000 crore in the December quarter.
Tata Steel is taking a number of steps to restructure its European operations. It has been able to reduce fixed costs by $2.2 billion from the FY08 level of $6.7 billion. It has restructured its UK operations, shut inefficient capacities and divested non-core assets, such as the Teesside slab plant.
However, the management's efforts have been masked by a weak operating environment.
"While the company continues to look for further efficiency improvement measures, such as streamlining employee strength, better efficiency at the newly rebuilt Port Talbot blast furnace, etc, we believe it would take time and an improvement in the overall scenario for these measures to fully reflect in profitability," says a Nomura report dated February 14.
