Standard & Poor's Ratings Services has upgraded the outlook on Tata Steel to stable from negative. At the same time, S&P affirmed its 'BB' long-term corporate credit rating on the India-based company.

It also assigned 'BB' long-term issue rating to the proposed senior unsecured notes denominated in US dollar and euro to be issued by Singapore-incorporated ABJA Investment Co, a 100% subsidiary of Tata Steel.

"Our outlook revision reflects our expectation that Tata Steel's operating performance will improve over the next three years," said Standard & Poor's credit analyst Vishal Kulkarni.

"We anticipate that the completion of the first phase of Tata Steel's Orissa greenfield project will generate positive free operating cash flow starting fiscal 2016. We therefore expect the company's financial metrics to improve with the ratio of funds from operations (FFO) to debt reaching 15% in fiscal 2016 and rising further in fiscal 2017," S&P added.

"We expect a rise in steel output of 3.5 million-4 million tons over the next three years, from the current 8.5 million tons, from the company's high-margin India operations to boost operating performance. At the same time, we expect the company to gradually strengthen its operating performance in Europe with the improving economic environment in the U.K. and eurozone," it said.

S&P believes Tata Steel will moderate its growth strategy for the next two years to improve its financial position.

"Our rating on Tata Steel continues to reflect the company's strong integrated India operations and its large steelmaking capacity. On the other hand, Tata Steel faces weak demand, excess capacity, particularly in Europe, and weak financial ratios."

"We expect Tata Steel to be able to manage its large debt maturities based on its strong banking relationships and access to capital markets," S&P further said.

"We consider the proposed notes as Tata Steel's debt obligation because: the notes are issued by a 100%-owned subsidiary set up to raise funds for Tata Steel; and they have a guarantee of up to 125% of principal and a cross-default clause with parent Tata Steel. The rating on the notes reflects this view and the company's intention to replace the notes with notes issued by Tata Steel soon after Oct. 1, 2014," it opined.

Shares of the company gained Rs 4.35, or 0.77%, to trade at Rs 566.35. The total volume of shares traded was 262,015 at the BSE (11.20 a.m., Monday).