Moody's Upgrades Outlook on Tata Steel & Affirms Ba2 CFR
Moody's Investors Service has changed the outlook on Tata Steel Ltd. to stable from negative. At the same time, Moody's has affirmed the company's Ba2 corporate family rating. Moody's Vice President and Senior Credit Officer Mr Kaustubh Chaubal said "The rating affirmation and outlook change to stable are driven by a solid recovery in Tata Steel's operations in the third quarter of fiscal year ending March 2021. We believe the company will sustain the improvement over the next 12-18 months, enabling its consolidated financial metrics to recover to levels more appropriate for its Ba2 CFR. The rating action also reflects the company's proactive financial management amid the pandemic and its publicly stated target of reducing gross debt by at least US$1 billion each year and prioritizing deleveraging over capital expenditure.”
RATINGS RATIONALE
India's (Baa3 negative) steel consumption declined by 55% during the first quarter of fiscal 2021 following a nationwide lockdown during the COVID pandemic. However, since the opening up of the economy in June 2020, pent-up demand from end-user industries, in particular automotive, white goods manufacturing, construction and infrastructure, have boosted steel consumption, containing the annual steel consumption decline to only about 11%.
Moody's estimates shipments for Tata Steel Indian operations during fiscal 2021 will stay largely flat. A benign industry environment, supportive government policies in the form of large infrastructure investments and markedly better prospects in the automotive industry have supported steel prices in India. These conditions have propelled TSI's record profitability in recent quarters. TSI's profitability has steadily improved to its 10-year high of INR 18,948 EBITDA per tonne (USD 253) during Q3, from INR 4,969 (USD 66) in Q1 fiscal 2021. Moody's forecasts a long-term sustainable EBITDA per tonne of INR 13,200 (USD 176) for fiscal 2022 for TSI, constituting a 30% gap compared with Q3. The company, therefore, has a substantial buffer especially given the benign operating environment. Moreover, the company's backward linkages with entire iron ore needs met from captive sources provide resilience to profitability even if steel prices were to severely fall.
In contrast, Moody's estimates shipments at Tata Steel's European operations will decline by about 10% during fiscal 2021 and for profitability to gradually recover. Europe's economic activity was affected by further lockdowns and a seasonally weak winter quarter, although it has improved since the early months of the pandemic. Moody's estimates TSE generated an EBITDA per tonne (adjusted for unusual items) of INR 2,370 (USD 32) in Q3, compared with consistent losses in the preceding three quarters of fiscal 2021. Given the volatile trajectory in TSE's historical profitability, Moody's remains cautious in its forecasts and assumes TSE will just about break even in fiscal 2022. In addition, TSE's sizable 10.0 million tonne capacity causes major swings to Tata Steel's consolidated metrics.
Tata Steel's consolidated financial metrics remain vulnerable to its volatile and fragile European operations, which have weighed on the company's credit profile and rating for a sustained period. That said, the highly profitable TSI, now comprises two-thirds of Tata Steel's group shipments, up from 61% in fiscal 2019 and 48% in fiscal 2018, somewhat reducing the drag on consolidated credit metrics.
Source - Strategic Research Institute