Global rating agency Moody’s has revised upwards its ratings outlook on Tata Steel and Tata Steel UK Holdings to stable from negative as its expects operating environment to improve in the long-term following recovery in financial performance over the past few quarters.
“Changes in the ratings outlook to stable from negative reflect our expectation that the benign operating environment and recovery in the financial performance of Tata Steel UK and Tata Steel over the last few quarters will continue over a longer term, leading to a sustained improvement in its credit metrics,” Moody’s vice president and senior analyst Kaustubh Chaubal said in a note Monday.
Tata Steel’s consolidated adjusted leverage — as indicated by adjusted debt/reported Ebidta — stood at an estimated 4.7x at end September, down from 8.9x in March 2016. Strong growth prospects in its key operating markets of India, Europe and southeast Asia — with steel consumption slated to grow, amid capacity removal in China, augur well for Tata Steel, it said.
Moody’s expects Chinese steel production capacity to continue to decline with the implementation of supply-side reforms and environmental protection measures that have forced closure of inefficient mills and prompted consolidation, leading to a decline in Chinese exports and supporting regional steel prices.
As for demand, Moody’s expects India’s steel consumption to grow in the mid-single digits in 2017 and 2018 on the back of economic activity on a likely pick up in GDP growth to 7.3-7.5%. Moreover, goods and services tax (GST) implementation will help the organised sector, and strong brand recall players, such as Tata Steel, will be major beneficiaries.
In Europe, Tata Steel, being the second largest by volume with expected annual shipments of 10 million tonne in FY18, will see sustained demand from key user industries like automotive, construction and capital goods. It expects European steel consumption to grow 2% in 2017 and by 1.5% in 2018, the report said.
As a result, consolidated operating/tonne will average Rs7,500-7,900 in FY18, higher than the stable outlook trigger of Rs7,000. Moreover with half the sales volumes from the higher profitable Tata Steel India business—that generates EBITDA/ tonne in the Rs10,000-Rs12,000 range, up from 40% in FY2016 — will drive a meaningful improvement in consolidated earnings, the agency said.
Following the memorandum of understanding (MoU) with Thyssenkrupp in September, Moody’s expects Tata Steel to enter into a definitive agreement for a joint venture (JV) of its European business by March 2018 and consummation of the JV by March 2019. The transaction is at an early stage with signing and possible closing subject to due diligence and approvals from respective shareholders and antitrust authorities.
