Tata Steel's asset sale plan to bring relief

Firm can now focus on profitable businesses, but improvement in global scenario is key

Tata Steel’s plan to sell its Europe-based long products business is a positive move. Tata Steel Europe (TSE), a subsidiary, has been struggling to keep its operations profitable in the wake of economic slowdown. Weak European demand and onslaught of cheap Chinese products added to its woes. As a result, TSE reported an Ebitda (earnings before interest, tax, depreciation, and amortisation) loss in the September quarter, a first since 2013. It’s not surprising that Tata Steel’s share price surged over 2.5 per cent on Wednesday to close at Rs 263.7 after the sale-plan announcement. Tata Steel has signed a letter of intent with investment firm Greybull Capital for exclusive negotiations for potential sale of TSE’s long-products business.

  The sale, if it materialises, has multiple gains. It will cover several UK-based assets, including the much-talked-about Scunthorpe Steelworks and other facilities in Europe. These have been the biggest drag on TSE’s profitability, despite the company trying various measures to turn around the Scunthorpe operations. It had cut around 1,200 jobs, but still employs about 4,700 people across Europe. While the deal value has not been spelt, a Reuters report pegs it slightly lower than £500 million (Rs 4,929 crore); about Rs 51 a share of Tata Steel. Analysts say valuation expectations are not high. The deal, expected to close in the March quarter, will not only result in gains by way of lower debt, but also boost TSE’s profitability. Also, steel demand and realisation remain weak in Europe, and there are issues such as litigation. So, analysts say that after the sale, TSE will have more time to focus on the profitable flat-products segment.

While the sale will bring some relief, challenges remain for Tata Steel, both globally and locally, as realisation and demand remain weak. Share prices of steel companies have been gaining recently, but that’s because the government is likely to impose a minimum import price, to curb cheap imports. Such measures will bring temporary relief. Analysts at Deutsche Bank say despite the imposition of 20 per cent provisional safeguard duty on hot rolled coils (HRC) in September, domestic HRC prices are still lower than levels before the safeguard duty announcement. Further, falling iron-ore prices will continue to pressure steel prices, which means Chinese export prices can decline further.

Analysts at Goldman Sachs believe imposition of the safeguard duty on value-added flat products and wire rods and plugging the above gaps would be positive for steel companies. They estimate a 20 per cent safeguard duty on value-added flats and wire rods could lead to 22 per cent and nine per cent impact on FY17 Ebitda for JSW Steel and Tata Steel, respectively.