Tata Steel performance improves but ratings unchanged: Moody’s

By: | Published: February 9, 2017 7:14 PM

Moody's Investors Service today said Tata Steel's operative performance has shown improvement on the back of government steps like import curbs besides company’s greenfield expansion in India but kept its ratings unchanged.

?Tata Steel Ltd (Ba3 negative) and Tata Steel UK Holdings Limited’s (TSUKH, B3 negative) ratings remain unchanged at this point in time. Although improving, credit metrics have yet to catch up with their respective rating categories,? Moody?s said in a statement. (Reuters)

Moody’s Investors Service today said Tata Steel’s operative performance has shown improvement on the back of government steps like import curbs besides company’s greenfield expansion in India but kept its ratings unchanged. The global ratings agency in February last year had downgraded credit ratings of Tata Steel by two notches to Ba3 from Ba1 on a weaker than expected operating performance in its key operating markets of India, Europe and South-East Asia on account of persistently weak steel prices.

“Tata Steel Ltd (Ba3 negative) and Tata Steel UK Holdings Limited’s (TSUKH, B3 negative) ratings remain unchanged at this point in time. Although improving, credit metrics have yet to catch up with their respective rating categories,” Moody’s said in a statement.

Tata Steel reported a consolidated revenue of Rs 832 billion and consolidated underlying EBITDA of Rs 98 billion for April-December 2016 — a period representing the first nine months of the fiscal year ending March 31, 2017 (FY2017) — up 3 per cent and 90 per cent respectively from a year ago.

For the quarter ended December 31, 2016, the company’s consolidated revenue of Rs 294 billion and consolidated underlying EBITDA of Rs 36 billion represented increases of 14 per cent and 4x respectively, reflecting the consistent improvement in performance, backed by an expansion of its Indian operations and a turnaround of its European EBITDA.

“We estimate Tata Steel’s consolidated adjusted leverage of 7.9x as of December 2016, continuing to decline from 14.5x as of March 2016 and 10.2x as of September 2016. We expect that Tata Steel’s consolidated earnings will continue to improve, such that leverage will fall towards 7.0x by March 2017, and approach 6.0x over the next 6-9 months,” the statement said.

It said even at these improved levels, leverage remains high and “exceeds the 4.5x-5.0x needed to change the company’s rating outlook to stable from negative.”

Moody’s said the improvement in Tata Steel India’s (TSI) operating performance was driven by the various measures taken by the Government of India (Baa3 positive) to curb imports, and the positive momentum across global steel markets since April 2016, and also supported by the company’s greenfield expansion at Kalinganagar that added 3 million tonnes per annum of crude steel capacity.

The steel giant’s Kalinganagar plant crossed 1 million tonnes of hot rolled coil production since commissioning in May 2016, and the company upgraded its guidance for FY2017 to 1.5 million tonnes from the earlier 1.3 million tonnes. “The additional capacity will help Tata Steel cater to a likely step up in demand over the next 12-18 months, driven by the increase in infrastructure spending, as outlined in India’s recent budget,” Moody’s said.

Moody’s said looking ahead, it expects the production ramp-up phase of the Kalinganagar operations and the resulting absorption of fixed costs to translate into improvement in EBITDA/tonne over the coming quarters.

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Moody’s also pointed out that TSI’s backward integrated operations — with 100 per cent captive iron ore supplies and 60 per cent captive coking coal supplies — position Tata Steel competitively, in a rising raw material price environment.

It said the continuation of the government measures to protect the domestic steel industry is imperative, especially with the global and regional overcapacity of steel.

As for the strong performance of Tata Steel’s European operations (TSE), this result reflected the restructuring of the UK business, operational improvements on the back of cost reductions and improved market conditions, it said.

TSE revenue of Rs 380 billion during April-December 2016 was down 11 per cent from the same period the year before, because deliveries were impacted by the company’s decision to reduce production volume in order to focus on higher value-added products in the UK, it said.

“Nevertheless, EBITDA turned positive, registering Rs 25 billion from negative Rs 7 billion in April-December 2015, reflecting the depreciation of the British pound relative to the Euro, a lower cost base in the UK, and more favourable market conditions,” Moody’s said.

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