Moody’s Investors Service on Wednesday upgraded Tata Steel’s corporate family rating (CFR) to ‘Ba2’ from ‘Ba3’, reflecting the sustained improvement in company’s credit profile. The outlook has been changed to ‘stable’ from ‘positive’.
Tata Steel’s leverage, as measured by adjusted debt/EBITDA, is on an improving trajectory and will fall below 3.5x by March 2020, from 4.1x at March 2018 and 3.9x at March 2019. EBIT/interest coverage will remain above 3.0x, the ratings firm said.
“The upgrade of Tata Steel’s CFR reflects the sustained improvement in the company’s credit profile, stemming principally from strong operating efficiencies and vertical integration, as well as stable demand and price conditions in its major market,” Moody’s said in a statement.
Tata Steel’s CFR is supported by its significant, diversified and growing operating base and globally cost competitive steel operations in India. It is also supported by ownership of key raw materials — iron ore and coking coal.
These factors, along with favourable industry dynamics in its key operating market in India, have translated into the company’s sustained track record of improving credit metrics, Moody’s observed.
According to Moody’s, Tata Steel’s India business is on a strong footing and growth prospects in the country augur well for the company. During the first nine months of the fiscal ended March 31, 2018, Tata Steel’s Indian operations generated EBITDA/tonne of `17,270 — more than three times the profitability of its European operations.
The ratings firm said Tata Steel’s CFR continues to reflect Moody’s expectation of timely, ongoing and extraordinary support from its parent Tata Sons. In addition, the successful integration of Bhushan Steel’s (Bhushan) steel assets in 2018 and the proposed acquisition of the steel business of Usha Martin have further cemented Tata Steel’s business profile, it noted.
The recent acquisitions have started reflecting in the strong earnings for the company. Tata Steel reported a sharp 54% jump in the consolidated net profit to `1,753 crore for the three months ended December 31, 2018, while consolidated net sales in Q3FY19 increased 23% y-o-y to `41,220 crore.
Moody’s expects India’s steel consumption to grow at 5.5%-6.0% annually over the next one-two years, supported by the country’s strong domestic demand, propelled by the government’s (Baa2 stable) spending on infrastructure projects and good prospects in the automotive industry.
At the same time, consolidation in India’s steel sector and limited new capacity commissioning over the 18-24 months will keep industry utilisation levels in check and help pricing discipline.
“A downgrade of the rating is unlikely in the near term, given today’s rating action. Nevertheless, a sharp shift in industry conditions that trigger declining sales volumes and dent pricing and profitability would pressure the rating. Specific metrics indicative of downward rating pressure include adjusted debt/EBITDA in excess of 4.5x or EBIT/interest coverage below 2.75x,” Moody’s said in a statement.
