Moody’s upgrades outlook on Tata Steel to stable from negative

Rating agency Moody’s Investors Services on Wednesday revised the outlook on Tata Steel from negative to stable and also affirmed the company’s Ba2 corporate family rating (CFR).

The stable outlook reflects Moody’s view that a benign operating environment will help to sustain its improving performance such that debt/Ebitda leverage trends below 4x over the next 12 months, indicating levels supportive of a Ba2 CFR.

The stable outlook also incorporates the expectation that Tata Steel will prioritise debt reduction over capex with an annual gross debt reduction of at least $1 billion. Moody’s regards the leverage improvement through gross debt reduction as a structural shift in the company’s financial policy and a credit positive, it said in a statement.

Kaustubh Chaubal, vice President and senior credit officer at Moody’s and lead analyst on Tata Steel said that the rating affirmation and outlook change to stable 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 said.

Chaubal added that the rating action also reflects the company’s proactive financial management amid the pandemic and its publicly stated target of reducing gross debt by at least $1 billion each year and prioritising deleveraging over capital expenditure.

Moody’s estimates shipments for Tata Steel Indian operations (TSI) during fiscal 2021 will stay largely flat. Also, a benign industry environment, supportive government policies in the form of large infrastructure investments and markedly better prospects in the automotive industry have supported steel prices in India.

These conditions, according to the rating firm have propelled TSI’s record profitability in recent quarters. TSI’s profitability has steadily improved to its 10-year high of Rs 18,948 Ebitda/tonne during Q3, from Rs 4,969 in Q1 fiscal 2021.

Moody’s forecasts a long-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.