Stock Review: Tata Steel

The sale of the mothballed Teeside Cast Products (TCP) for around $500 million has added anew dimension to Tata Steel's cost-saving and operational rationalisation initiatives, 'Fit for the future' and 'Weathering the storm'.

The 3.9-mtpa (million tonnes per annum) capacity was a drag on the company's profitability and was also a pressure point politically. The proposed sale to Thailand's Sahaviriya Steel Industries (SSI) is expected to bring in around `25 per share, say analysts. While Tata Steel will be selling the blast furnace and steel-making facilities, it will still have apart of the bulk terminal, which will be operated as a joint venture between Tata Steel and SSI.

The deal values TCP at around $128 per tonne, a sound valuation for a plant that was mothballed. The initiatives undertaken by the company will also help save around $375 million at Corus. Profits at Corus improved in the June quarter, with earnings before interest, tax, depreciation and amortisation (Ebitda) rising to $105 per tonne, as compared to a loss of $129 per tonne in the same quarter of the previous year.

However, the upcoming quarters are expected to see lower Ebitda, as rising input costs and seasonal low volumes drag the sales numbers. Analysts are even estimating an operating loss. But, the unexpected TCP sale would be a game changer for Corus. Improving price conditions in Europe could also provide an upside for the company.

Analysts at Goldman Sachs point that Tata Steel Europe has less than five per cent exposure to Southern Europe, which is a healthy sign since the area is a major cause for concern. A majority of its shipments are to the UK, Germany and France, which have been far more resilient in the current economic environment. Moreover, Corus has less than 20 per cent direct exposure to construction –the most vulnerable sector in Europe – while a 40 per cent exposure to the strong auto and machinery sector, they add. A single percentage point increase in steel prices in Europe could increase Ebitda by 5.6 per cent.

Hence, the company is gearing to make itself fit when the steel cycle turns.

The sale of the moribund asset will aid cash flows and stimulate cost-cutting initiatives