Asset sale must for Tata Steel to improve operations: IIFL

Tata Steel's board is expected to meet today to discuss sale of its UK assets. Sources have told CNBC-TV18 that the steel major is likely to hold asset sale as of now. If the deal does not go through, some pressure will be seen on the stock in near-term, says Tarang Bhanushali of IIFL who has a reduced rating on Tata Steel. In case of no deal, the target price for the stock is Rs 305. However, if the company manages to offload its assets, stock could rally to levels of Rs 346. Operations for the company too will improve from 2018 in this scenario. Bhanushali doesn’t see margins for steel players improving much in next 2-3 years. Utlization levels are high, capacities at sub 70 percent and demand looks subdued for the sector, he says. Below is the verbatim transcript of Tarang Bhanushali’s interview to Anuj Singhal & Sonia Shenoy on CNBC-TV18..Anuj: A lot of uncertainty coming back in Tata Steel for UK operations. How did you read the situation yesterday and the fact that the stock declined four percent and do you think the stock will underperform now?A: Yes, very much. If the deal doesn't go through the asset sale is very important for the company right now. We believe that once the asset sale is over the company's operations would be quite profitable from FY18. So, if the deal doesn't go through then again it would be a cash burn for the company and again would not lead to the rerating everyone was expecting post the asset sale announcement. So, there would be some pressure in the stock in the near term.Sonia: So, when you say pressure in the stock what are you looking at in terms of a target price because the stock has just not made it to that Rs 350 level. It is finding it tough to get above that. In the very near term, say 3-6 months what are you expecting?A: We have a reduce rating on the stock with a target price of Rs 305. If the deal doesn't go through then the target price would be Rs 305. But if the deal goes through, the company manages to sell its assets then the target price would improve to Rs 346.Sonia: There is some thought that perhaps because the steel prices are rising maybe the management has a bit more confidence and doesn't want to sell the plant at this point. Would you concur with that view or do you think that it doesn't make a difference, it is still better if they go ahead and sell the plant?A: We have seen some improvement. If you look at this quarters number it would be a positive earnings before interest, taxes, depreciation and amortisation (EBITDA) for the European operations also. So, yes, there is improvement but how long will it sustain would be a doubt. If you look at the longer term picture then maybe this asset sale would be quite favourable. Also turning around the operations in UK would be quite difficult and with the pound depreciating also the sale to European countries the company sales would be impacted because of that. So, all in all if the management doesn't go through with the asset sale then yes, it would be an underperformer in the near term.Anuj: Last month we heard how Tata Steel could be selling the assets at the bottom of the cycle. So, in that case - if you were to play devil's advocate - could there be a case that if this does not go through maybe in the medium to long term it could actually turn out to be a positive for Tata Steel?A: Steel as a sector I don't think the high cost capacities would make money over the long term. There is already excess capacity in the system. China and the utilisation levels if you look at is sub 70. So, things to improve drastically from here on looks quite difficult. The demand growth would be quite subdued and as a result we believe that margin for most of the players would not improve over the next 2-3 years. Yes, there would be improvement but not to the scale wherein the high cost capacities like Tata Steel UK will turn profitable. So, even if you look at over a three year or four year scenario then again turning around the UK operations would be quite difficult other than the local government over there interfering and reducing the pressure on imports or providing support to the company to run operations.