Citi can't stop raving about Tata Steel's Oz sellout

Tata Steel’s decision of selling its stake in Riversdale Mining for over Rs 5,000 crore (A$ 1,060 million) has got analysts all excited. Citi gives the transaction a big thumbs-up, terming it as a positive move.

Tata Steel divested a 27.72% stake in Riversdale Mining to Rio Tinto after holding it for less than four years. The sale gives Tata Steel a 100% return on its investment.

Citi, in its brokerage report, said the transaction will help generate cash for the future growth, which in turn will help bring down its net debt-to-equity ratio to 1.17 from 1.3. The beauty of the transaction is it does not affect Tata Steel’s ability to source coal from Riversdale. Tata Steel will be sourcing 40% of the Riversdale’s Mozambique coal assets still. It will continue to hold 35% in Riversdale Energy (Mauritius), a subsidiary of Riversdale Mining which owns the coal assets in Mozambique.

These assets are to be developed in three phases. The first phase alone may see an output of 1.72 million tonnes of coking coal. This means Tata Steel would mine 8 lakh tonnes from the reserve once the capacity is fully ramped up – which is expected to be over by the end of 2012.

The sale to Rio Tinto is part of Tata Steel’s broader strategy of unlocking value from non-core assets. The company has, in the recent past, sold its Teeside Cast Product plant in North England for $469 million as well as its 51% stake in Tata Refractories – it held 77.46% before the sale – to a strategic partner for $129 million. Tata Steel had indicated that it has a potential of unlocking $500 million from sale of non-strategic assets in India.

Citi has reiterated its ‘buy’ on the company as it feels that the steel firm continues to rack up the strongest domestic margins. Domestic sales are expected to jump to 32% from 25% by December 2011. The European unit, Corus, is slowly getting back to its groove as supplies are being taken care of, thus boosting its margins. But the demand outlook remains a worry.

Citi remains positive on the stock with a 12-18 month timeframe and a price target of Rs 777. At 1.30 pm, the scrip was trading at Rs 569, 2.9% higher, on the NSE on Friday.