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S&P upgrades Tata Steel rating on deleveraging, strong operating momentum


S&P Global Ratings on Tuesday raised its rating on Tata Steel and its subsidiary ABJA Investment Co. Pte. Ltd to ‘BB-‘ from ‘B+’. It also raised the long-term issue rating on the senior unsecured notes issued by ABJA.

S&P said the benefits of strong cash flow and the company’s intention to reduce debt should help Tata Steel to materially deleverage over the next two years.

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The rating agency has a stable outlook as the company’s adjusted debt is to decline by about 30% by March 2023 from the March 2020 level of about Rs1 trillion, leading its credit metrics to steadily improve.

The company’s free operating cash flows will be adequate to facilitate this reduction over the next two years, thus revising capital expenditure (capex) estimates of about Rs9,000 crore per year, up from Rs5,000 crore-Rs6,000 crore in fiscal 2021.

S&P said Tata Steel will moderate its investment plans, if required, to meet this objective. The company reported sizeable debt reduction in fiscal 2021, thanks to stronger cash flow generation, recent equity raising of about Rs3,300 crore, and working capital improvements of about Rs12,000 crore.

However, S&P said it treats as debt substitution some of Tata Steel’s working capital-related debt reductions in fiscal 2021, such as Rs6,000 crore in export advances and securitization of receivables at Tata Steel Europe (with a facility size of £475 million).

This implies a comparatively lower level of deleveraging compared with the company’s reported numbers.

“The stable outlook reflects our expectation that Tata Steel will significantly reduce debt over the next 12-24 months, supported by strong operational cash flow,” S&P said. It also reflects expectations that the company’s debt reduction would result in lower volatility in its credit metrics compared with the previous steel cycle, with greater resilience during downturns, the rating agency said.

The base case shows that Tata Steel has adequate headroom at the current rating level. However, rating would get lower if the company takes on additional debt, such that its FFO-to-debt ratio fails to remain well above 15% on a sustained basis.

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