Sale of Scunthorpe plant to cut losses for Tata Steel: Macquarie

Greybull Capital is likely to announce a deal to buy Tata Steel Europe’s Scunthorpe Works on Monday for around 400 million pounds. Scunthorpe has a capacity of 4.5 million tonne and contributes 25 percent to Tata Steel Europe. Rakesh Arora of Macquarie Capital Securities said that this deal will help losses in the company’s consolidated entity to come down.Tata Steel, on March 30, said that it is putting its British assets for sale citing a global oversupply of steel, high costs, weak domestic demand and a volatile currency.Speaking to CNBC-TV18, Arora said that the sale of loss-making assets is positive for Tata Steel as it will help the company cut its losses.Arora expects further momentum in the stock post the news, but adds that no change in valuations will happen.Recommending profit booking, Arora said: “Sell on news is the strategy here.”Below is the verbatim transcript of Rakesh Arora’s interview with Sonia Shenoy and Anuj Singhal on CNBC-TV18.Sonia: First if you could just put this into perspective for us. How much of a positive could this be for Tata Steel and how are you positioned on the stock ahead of this impending deal?A: Tata Steel has put in process trying to sell all its assets in UK which includes Scunthorpe and Port Talbot. Now, the Scunthorpe deal was in making for last two years, they have been discussing with Greybulls for pretty long time and now they have the whole support from the UK government which also wants deal to go through. So, there is a possibility they might announce something. Now, from Tata Steel’s perspective, it is very clear that after struggling for almost six to seven years, they have given up hope of turning around these assets and clearly things are much more difficult than what was initially envisaged. So, just Tata Steel getting out of these assets is positive enough. In terms of earnings, etc these assets are all loss making. So, to that extent the losses in the consolidated entity will come down and hence it is positive even if there is no consideration for these deals.Sonia: You said that the losses in the consolidated entity will come down with the sale of this Scunthorpe plant and even if there is no consideration it is fine but what enterprise value or what valuations if it comes through would impress you for this deal? A: A zero would be good enough for me to get positive on this deal but there are lot of numbers floating around but just to clarify, this will not be cash paid out to Tata Steel. It is more like an investment package which would include infusion of some money into these assets to make them workable and provide working capital, lay off certain people, become more competitive. So, we are not expecting any cash to be given to Tata Steel on sale of these assets. They will be happy if they don’t have to pay anything to get rid of that.Anuj: The stock of Tata Steel has seen fair bit of rally. How much of good news do you think is already priced in? As we move forward with incremental piecemeal news, do you think the stock would deserve maybe slightly higher re-rating?A: At the current valuations stock is factoring in most of the positives and I don't feel that there is too much upside, though the momentum remains with the stock at the moment because steel prices are still going up globally and in India also steel prices have been increased only recently in first week of April. Secondly, most of these companies have done very good volume growth numbers in Q4. Obviously, minimum import price (MIP) has helped to some extent, but there is a recovery in demand that we are seeing. So overall momentum remains positive and once Tata Steel able to get rid of these assets in UK there's further momentum, so stock might go up further but value wise I don't think there is too much upside.Sonia: So is it fair to say that you would not advise investors to buy the stock at this level, those who have missed out on the rally so far?A: Surely, we would say that it is rather time to book profit. So, sell on news is the right strategy.