Moody's Investors Service, has upgraded Tata Steel corporate family rating to Ba1 with a stable outlook. Moody's has also confirmed Tata Steel UK Holdings corporate family rating and probability of default rating at B2/B2-PD with a positive outlook. This concludes the rating review announced on Jul. 28, 2014 in response to the Group's USD 6.9 billion refinancing exercise and which was extended on 18 September when a rating uplift of one notch, to reflect Tata Group support, was assigned to several Tata entities, including Tata Steel. Ratings with respect to TSUKH's Senior Facilities Agreement dated September 2010 have been withdrawn as a result of the refinancing.
The upgrade of Tata Steel's rating reflects the group-wide refinancing and the improved liquidity which will support further growth of its highly profitable Indian operations. At the same time, the pressure to support TSUKH's working capital has abated in the wake of the refinancing of its senior facility agreement while better and sustained margins have led to reduced losses at TSUKH.
TSUKH's new term loans eliminate refinancing risk for at least five years and enjoy no financial maintenance covenants but with the cap on annual capital expenditure remaining .
Although the European market still suffers from overcapacity and a weak price environment, TSUKH's restructuring measures and focused capex have kept it cost competitive and enabled it to benefit from the slight pick-up in European demand.
''The positive outlook on TSUKH's rating depends on further improvements in profitability, and the disposal of the long products segment, currently under discussion, would certainly reduce losses in the UK operations,'' says Alan Greene, a Moody's vice president, senior credit officer.
''At the same time, TSL's Ba1 rating also reflects our expectations of less drag from TSUKH. Upward pressure on TSL's rating would require a successful execution of its growth plan in India, such that the majority of the Group's steel is poured in India, while maintaining its strong profitability,'' says Greene, who is the Lead Analyst for Tata Steel.
The profitability of the Indian business remains one of the highest in the industry. This will be supplemented by the start of a new 3 million ton per annum (mtpa) plant in Odisha, later in 2015. In the year ended Mar. 31, 2014 (FY2014), TSL's operations in India represented 32% of group volumes while generating 81% of the group's EBITDA.
In 2014, the Indian market has come under increasing price pressure with domestic steelmaking capacity expanding more rapidly than the growth in demand, and with increasing imports of cheap steel. While smaller domestic steelmakers have come under pressure, Tata Steel, as one of the three largest steel producers in India, has been able to maintain high plant utilisation and some price premium.
''With the pro-investments measures announced in the budget presented by the new government, the steel market imbalances created last year by slow demand growth and large capacity expansion should see a gradual improvement,'' says Greene.
However, the raw material supply situation has been a growing concern ever since the iron ore mining ban in Karnataka in 2011. Although the mining restrictions imposed there or indeed those in Goa did not impact Tata Steel, in 2014 the company's captive mines in Odisha and Jharkhand were the subject of brief closures. This led Tata Steel to issue a profits warning for Q3 FY15. Similarly, the coal sector was impacted in 2014 by the cancellation of previously allocated coal blocks in 2014 - although Tata's long-established mines were not affected.
Tata Steel's captive raw materials in India are the key factor behind its superior margins, and while we expect its existing units and expansion plans to continue to benefit from raw material linkages, uncertainty in the supply of domestic coal and ore could affect longer-term investment plans and profitability.
Tata Steel reported a 29% increase in EBITDA to Rs 164 billion in FY2014 and an increase in reported gross debt to Rs 787 billion, as at 31 March 2014, from Rs 661 billion in FY2013. The consolidated adjusted debt/EBITDA was 5.2x for FY2014, compared to 5.6x for FY2013. Moody's expect debt/EBITDA to remain around 5x in FY2015.
The rating outlook for the group is stable reflecting the good prospects in India and broadly maintained production and profits in Europe together with and the improved funding structure of the group following the US dollar notes issue, the new facilities in Europe and the Rs 225 billion project finance facility directly available to the parent. We expect credit metrics to remain elevated for the rating in the near-term because the cash generated from the highly profitable Indian operations is insufficient to outweigh the impact of rising debt levels from the continuing capex in India and losses from the UK operations.
Shares of the company gained Rs 7.3, or 1.85%, to trade at Rs 402.00. The total volume of shares traded was 0 at the BSE (9.02 a.m., Friday).
