Rating agency Moody’s Investors Services on Wednesday revised the outlook on Tata Steel from damaging to steady and also affirmed the company’s Ba2 corporate loved ones rating (CFR).
The steady outlook reflects Moody’s view that a benign operating atmosphere will assist to sustain its enhancing overall performance such that debt/Ebitda leverage trends under 4x more than the next 12 months, indicating levels supportive of a Ba2 CFR.
The steady outlook also incorporates the expectation that Tata Steel will prioritise debt reduction more than capex with an annual gross debt reduction of at least $1 billion. Moody’s regards the leverage improvement by way of gross debt reduction as a structural shift in the company’s economic policy and a credit positive, it stated in a statement.
Kaustubh Chaubal, vice President and senior credit officer at Moody’s and lead analyst on Tata Steel stated that the rating affirmation and outlook adjust to steady are driven by a recovery in Tata Steel’s operations in the third quarter of the fiscal year ending March 2021. “We believe the company will sustain the improvement over the next 12-18 months, enabling its consolidated financial metrics to recover to levels more appropriate for its Ba2 CFR,” he stated.
Chaubal added that the rating action also reflects the company’s proactive economic management amid the pandemic and its publicly stated target of minimizing gross debt by at least $1 billion every year and prioritising deleveraging more than capital expenditure.
Moody’s estimates shipments for Tata Steel Indian operations (TSI) throughout fiscal 2021 will remain largely flat. Also, a benign business atmosphere, supportive government policies in the type of big infrastructure investments and markedly improved prospects in the automotive business have supported steel rates in India.
These circumstances, according to the rating firm have propelled TSI’s record profitability in current quarters. TSI’s profitability has steadily enhanced to its 10-year higher of Rs 18,948 Ebitda/tonne throughout Q3, from Rs 4,969 in Q1 fiscal 2021.
Moody’s forecasts a extended-term sustainable Ebitda/tonne of Rs 13,200 for fiscal 2022 for TSI, constituting a 30% gap compared with Q3. “The company, therefore, has a substantial buffer especially given the benign operating environment,” the rating firm noted.