Retain ‘hold’ on Tata Steel, target Rs 205

Retain ‘hold’ on Tata Steel with a target price of R205 per share. We believe the potential divestment of its UK’s long product assets is unlikely to help in deleveraging. We foresee the deal size to be small given that a) book value of the assets have been entirely written off; b) most European steel peers are trading at 0.2-0.5x P/B; and c) turnaround investors like Greybull is unlikely to pay a strategic premium for the asset.

Tata Steel has signed a letter of intent (LOI) with Greybull Capital to enter into exclusive negotiations for the sale of its UK long product assets including loss making Scunthorpe unit and other smaller assets in Dalzell and Cydebridge which are currently mothballed. Tata’s long product asset in Scunthorpe has a rated capacity of 4.5 million tonnes and operational capacity of 3.1 million tonnes. UK long product assets employ around 4,700 people (27% of of TSE’s UK employees, 16% of TSE’s employees).

Tata would now enter into detailed negotiations with Greybull Capital, which would determine whether deal goes through and at what valuations. Tata has indicated its intention to divest its long product business in UK for some time now.