Standard & Poor's Ratings Services said today that a potential sale by Tata Steel  (BB/stable/-) of  its European long steel products business and associated distribution activities is credit positive for the company and its U.K. subsidiary Tata Steel UK Holdings (TSUKH: BB-/Stable/B). We expect Tata Steel to use the proceeds from the proposed divestment to repay debt at TSUKH.

''The proposed sale could help lower leverage, improve profitability, and enhance focus on the steel strip and specialty steel businesses, benefiting TSUKH, and in turn Tata Steel,'' said Standard & Poor's credit analyst Vishal Kulkarni. Historically, the long products business has been a drag on Tata Steel's profitability but it has been improving. However, we acknowledge that any long-term sustainable improvement in this business would need significant capital investment and management focus. The long products segment in Europe has been affected by a drop in construction activity with recovery being
uncertain.

We note that Tata Steel's engagement with Klesh Group for the potential sale of its European long products business is non-binding and could take three to six months to complete.

We expect Tata Steel's operating performance to improve over the next 12 months because of higher steel output in India, lower capital expenditure, and improving profitability at its Europe operations. We believe Tata Steel is fully committed to supporting TSUKH because it considers the subsidiary to be a strategic long-term investment. We expect Tata Steel's ratio of funds from operations to debt to be 13% in fiscal 2015 (year ending March 2015), and improve to 17% in fiscal 2017. We will be able to assess the impact of the proposed divestment on the company's financial performance once it has been finalized.

Shares of the company gained Rs 1.95, or 0.44%, to trade at Rs 441.80. The total volume of shares traded was 241,657 at the BSE (10.50 a.m., Friday).