Corus will not fetch good valuation: Analysts

Hopes of asset sales at the European operations could be good news for investors in Tata Steel, but analysts do not see a near-term possibility of any large asset sale, given the poor industry environment in Europe and possibility of lower valuations.

Tata Steel Europe contributes almost 50 per cent of the sales volume of the consolidated entity. Its European operations in the recent past have suffered due to lower steel prices, falling volumes and higher input costs. For instance, in the December quarter, Tata Steel Europe reported an operating loss of $78 million and earning before interest, tax, depreciation and amortisation per tonne came to negative a $26 compared to a negative $2 in the September 2012 quarter. This also had a huge repercussion on the consolidated profitability of Tata Steel.

That apart, the debt relating to European operations (due to acquisition of Corus) is eroding the profits. "Selling assets in Europe could be good news from the stock point of view. It is possible, given that the company is already having huge debt and for its expansion in India, it will require further debt. So, bringing down some debt at the consolidated level through asset sales could be a good idea. But, the question really is, can they sell such huge assets at a time when the European markets are not doing well and there is huge supply? And, think about the (low) valuations that Tatas will get under the present conditions in Europe. Maybe, we can expect loss-making smaller capacities going for sale rather than the large capacities like in the UK and Ijmuiden," says an analyst with a foreign broking house.

Though these possibilities cannot be ruled out given the company's huge debt, analysts also say Tata Steel has already spent a lot of money on these capacities with some of these now making profits. "I do not think there is a possibility of selling the UK and Ijmuiden capacities, because like in the case of Ijmuiden capacity Tatas have invested heavily in its state-of-the-art plant. Why would Tata Steel sell it? However, one cannot rule out anything, given the huge consolidated net debt of Rs 50,000 crore as on FY12, of which about Rs 40,000 crore alone comes from Tata Steel Europe," says Jatin Damania of SBICAP Securities.