Moody's Upgrades Tata Steel's Long Term Rating To Baa3 On Solid Credit Profile, Indian Steel Operations

Moody's Investors Services has upgraded Tata Group-backed leading steelmaker, Tata Steel's ratings to investment grade with a Baa3 issuer rating. Also, the rating agency has assigned the company's outlook to 'Stable' from positive. Further, it withdrew the company's Ba1 corporate family rating. The upgrade is on the back of continued strength in the credit profile of Tata Steel along with its solid market position in India. Also, the 1.25 billion pound deal with the United Kingdom is seen as a positive development for the company.

On Monday, Moody's highlighted that the Baa3 issuer rating on Tata Steel reflects the company's large-scale, globally cost-competitive, vertically integrated steel operations in India (Baa3 stable).

Also, the sustained improvement in its European operations especially following the expected closure of the loss-making upstream operations in the United Kingdom (Aa3 negative); and additionally, the company's close association with its parent, Tata Sons are key positives.

Kaustubh Chaubal, a Moody's Senior Vice President said, "The upgrade reflects our expectation of the continued strength in Tata Steel's credit profile due to the company's solid market position in India. We expect the company's profitability to increase even as softer steel prices dent revenues."

Chaubal who is also a lead analyst at Tata Steel added, "The upgrade also reflects the company's considerable deleveraging through gross debt reduction and our expectation that Tata Steel will maintain conservative financial policies with a well-balanced capital allocation and financial metrics appropriate for its Baa3 rating."

Earlier this month, Tata Steel entered into a mega deal with the UK government for jointly investing 1.25 billion pounds in the state-of-the-art Electric Arc Furnace steelmaking at the Port Talbot site. This is also inclusive of a grant of up to 500 million pounds from the Rishi Sunak-led government.

In the case of the UK deal, Moody's said, "Concurrently, the company has begun consultation with its employees with respect to the BF closure. While one-off restructuring costs may need to be incurred, the EAF will transform its cost position in the UK, and the BF closure will arrest the significant drain to earnings; a credit positive."

It added, "The likely improvement in its UK cost structure and the relatively better performing Dutch operations will ensure, in Moody's view, Tata Steel's credit profile remaining solid, even as steel prices remain soft and global steel demand weakens amid rising interest rates and a weak economic outlook in most end-user markets."

However, Moody's rating also captures the company's exposure to the inherent volatility in steel prices and spreads, and the historically volatile performance of its European operations.

According to Mooduy, Tata Steel's European operations (TSE) lack backward integration and have historically generated volatile earnings, a drag on the company's credit profile. TSE produces seven million metric tons per annum (mtpa) in the Netherlands (Aaa stable) and three mtpa in the UK. In particular, frequent outages at its UK plant that is soon approaching the end of its useful life have dented TSE's -- and by extension, Tata Steel's consolidated earnings.

But the company's strong presence in the world's second-largest steel market, India, will be a key driver of the company's credit profile.

India is expected to witness a rise in steel consumption at a 7% cumulative annual growth rate until 2030, fueled by continuous, large infrastructure investments as well as increasing demand from the auto sector.

Further, Moody's pointed out that even as substantial capital expenditure continues, Tata Steel will still generate large free cash flow, enabling debt reduction with consolidated debt/EBITDA leverage comfortably below 2.0x - 2.5x over the next two fiscal years.

In regards to the liquidity position of Tata Steel, Moody's believes it is "good". The company is benefitting from its ~$2.3 billion in cash and liquid investments as of the end of June 2023 and $2.25 billion in undrawn term loans (long term) and working capital credit lines in India (364-day facilities) and Europe (multi-year revolving credit facility maturing in March 2026).

"These liquidity sources, combined with Moody's expectation for cash flow from operations, will be sufficient to fund the company's capital spending, working capital needs, scheduled debt maturities and dividend payments over the 15 months till September 2024," it said.

Given Tata Steel's longstanding relationships with Indian and multinational banks as well as its association with the Tata brand, as per Moody's, provide it with adequate flexibility to smoothly tide over any temporary mismatches.

Meanwhile, the stable outlook indicates Tata Steel's strengthening credit metrics that Moody believes can be sustained even as the company invests in building new capacity in India and Europe. It also reflects the rating agency's view that Tata Steel will maintain its prudent discipline in capital allocation and financial policies, and operate with credit metrics appropriate for its Baa3 rating.