Care raitings has downgraded close to R32,226 crore of Tata Steel’s various debt instruments by one notch, citing continuing uncertainties related to the disposal/restructuring of its stressed UK business. These instruments include long-term unsecured rupee loan, unsecured debentures, and unsecured perpetual bonds. The revised rating, however, continues to place the company in stable category.
Tata Steel reported a consolidated net loss of R3,179 crore for the year ended March 2016 on the back of R1.17 lakh crore net sales. According to Bloomberg, Company’s gross debt at the end of September 2016 stood at R82,778 crore.
CARE revised the rating of unsecured non-convertible debentures of R7,151 crore from AA+ to AA, of long-term bank facilities of R22,800 crore from AA+ to AA, and perpetual bonds issue from AA to AA-.
“The revision in the ratings of Tata Steel Limited takes into account the continuing uncertainties relating to the disposal/restructuring of its stressed UK business, the moderate financial risk profile of the company as reflected in its high gearing and below average debt coverage indicators in the category as well as low visibility in the short to medium term of sustainability of margins achieved in recent past,” the credit agency said.
The rating agency observed that while the performance at European operations has witnessed an improvement in the short term, it has remained volatile over the past few years. The current improvement in performance is in part attributable to the depreciating pound as well as current status quo in trade agreements between UK and EU.
“The company has therefore benefitted at its UK operations as a result of the weakening of the Pound which has impacted imports and has also helped improve the domestic pricing for TSE,” the rating agency said.
Moreover, the gross cash accruals have steadily declined from R8,226 crore in FY13 to R5,501 crore in FY16. The increase in debt also deteriorated gearing levels to 2.66 times in FY16 from 1.84 times in FY13.
In the last 4 years, Profit before interest lease, depreciation and tax (PBILDT/tonne) at the group level reduced from R5,320 crore in FY13 to R3,045 crore in FY16 adversely impacting its debt protection matrices. “This was primarily due to losses at the European operations as well as the falling profitability at the India level,” the agency added.
In a note, to investors, UBS said it expects a very weak Q3 for Tata Steel. “We expect Europe EBITDA/to come in at R3,000 ($45/t) a sequential decline due to raw material costs,” UBS said.
“We forecast Q3 consolidated Revenue/EBITDA/PAT of R262/26/-4 billion. Guidance on Q4 will be important, with the ongoing correction in the hard coking coal prices providing some reassurance. We lower our FY17E/18E EBITDA by 14/16%,” UBS added.