Tata Steel has initiated discussion with SSAB, Sweden for a complete divestment of its Netherland assets.
Shares of Tata Steel jumped over 6% on Tuesday morning to trade at Rs 525 per share. The up move came after the company posted its quarterly results late Friday evening that came along with the announcement of its plans to divest the Netherland business. Tata Steel’s consolidated net profit came in at Rs 1,546 crore against a net loss of 4,373 crore in the previous quarter. Tata Steel’s performance mirrored the trend of many listed entities, beating the street estimates. Shares of Tata Steel have now surged 105% since the end of March this year. While some analysts believe that there is more upside potential in Tata Steel, some are of the view that it is now time to reduce stake in the stock.
Netherlands divestment constructive step
Tata Steel has initiated discussion with SSAB, Sweden for a complete divestment of its Netherland assets. “An exit from the cash-guzzling UK assets is more crucial and a combined deal would have been ideal but in the absence of bids, separate divestment is the next best option, in our view,” said analysts at Kotak Securities. They added that the deal at a potential EV of$2.5-3.3 billion would add Rs 70-150/share to their fair value of Tata Steel. Kotak Securities has a ‘Buy’ rating with a fair value of Rs 635 per share.
The street might be disappointed with the divestment not including the UK operations but Edelweiss sees the move as a positive. The Netherlands unit is a profitable one, divestment there would help Tata Steel garner better cash proceeds. “We do not expect significant hurdles (similar to merger with ThyssenKrupp’s Steel division) due to limited overlap of products and markets,” Edelweiss noted in a report while pinning a target price of Rs 565 per share.
UK operations remain key overhang
Analysts at Motilal Oswal although believe that divestment in Netherlands could lead to further deleveraging, they still see the loss-making UK operations as a key overhang. “A second wave of COVID-19 could deter the demand outlook (in Europe). While TATA has plans in place to divest its Netherlands operations, its continually loss-making UK operations remain an overhang on the stock,” they said. Motilal Oswal has a ‘Neutral’ rating on the stock with a target price of Rs 456 per share.
Along with the loss-making UK unit, brokerage and research firm Prabhudas Lilladher believes that current steel prices ride on risk of over optimism. “As odds increase in favor of withdrawal of stimulus by China with the achievement of expected economic recovery and limit the overheating of the economy, we believe that current steel prices ride on risk of over optimism,” they said in a note. The brokerage firm sees risks to the earnings and stock performance as it maintains a ‘Reduce’ rating with target price of Rs 405 per share.
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