Tata Steel Ratings Raised To 'BB' On Significant Expected Deleveraging, Outlook Stable

Rating Action Overview

- We expect Tata Steel Ltd.'s debt levels to decline materially over the next two years on the company's commitment to deleverage, supported by strong operating cash flows.

- Continued strength in steel prices has accelerated the company's deleveraging; in our base case, we expect Tata Steel's adjusted debt to decline by more than 30% by March 2023 from its March 2021 level.

- On Aug. 3, 2021, S&P Global Ratings raised its long-term issuer credit rating on Tata Steel and its subsidiary ABJA Investment Co. Pte. Ltd. to 'BB' from 'BB-'. We also raised the long-term issue rating on the senior unsecured notes issued by ABJA to 'BB' from 'BB-'.

- The stable outlook reflects our view that Tata Steel can adequately deleverage to reduce volatility in credit metrics during industry downturns. The stable outlook also reflects continued favorable financial policies, especially toward leverage.

Rating Action Rationale

Management's commitment to deleverage, supported by above-average strength in steel prices, helps Tata Steel to accelerate debt reduction. We estimate Tata Steel's adjusted debt (including customer advances and securitized receivables, among other standard S&P Global Ratings adjustments) will fall to about Indian rupees (INR) 600 billion (about US$8 billion) by fiscal year ending March 2023 in our base case, from about INR915 billion as of March 2021. This would significantly outperform the company's stated intention to reduce debt by at least US$1 billion per year, and continue the trend of declining debt from March 2020, when the company reported INR1.1 trillion in debt. While the company has resumed some growth in capital expenditure (capex), the increase in capex is still small in relation to the operating cash flows and does not affect the path of deleveraging. We expect capex of about INR110 billion annually, up from about INR70 billion in fiscal 2021. In our base case, we forecast the company's EBITDA and free operating cash flow of about INR1 trillion and INR350 billion-INR400 billion, respectively, over fiscals 2022 and 2023. This is despite our assumption of a 10% decline in steel prices in fiscal 2023 from the current level.

Deleveraging should improve resilience of Tata Steel's credit metrics through the steel price cycle. We expect the company's ratio of funds from operations (FFO) to debt to remain above 25% even at mid-cycle prices, a level at which we estimate the company's EBITDA per metric ton to be about half the current level. Furthermore, we estimate Tata Steel's FFO-to-debt ratio at about 15% at the bottom of the steel cycle, well above the 6% the company reported in fiscal 2020. The improved resilience of the company has reduced downside rating risk, in our view.

We also believe the commissioning of the ongoing 5 million tons per year capacity expansion at the Kalinganagar facility will significantly strengthen the company's credit profile over the next three to four years. This is especially so since the facility will be added without material debt and will improve Tata Steel's profitability with accompanying cold-rolled mill and pellet plant facilities also being set up. In addition, we expect the company's European operations to be EBITDA positive in the forecast period, although its contribution to the group's overall earnings will be small.

Outlook

The stable outlook reflects our expectation that Tata Steel will continue deleveraging to improve its resilience to downturns. At current steel prices and expected debt levels, the company's FFO-to-debt ratio will likely exceed 45% over the next two years. The outlook is based on our expectation the company's FFO-to-debt ratio would remain well above 25% even if steel prices decline to mid-cycle levels.

Shares of TATA STEEL LIMITED was last trading in BSE at Rs. 1407.1 as compared to the previous close of Rs. 1409.95. The total number of shares traded during the day was 406161 in over 11198 trades.

The stock hit an intraday high of Rs. 1420.5 and intraday low of 1390.6. The net turnover during the day was Rs. 570709112.

Source : Equity Bulls

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