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Announcement:

Moody's: Tata Steel's Q4 2012 an improvement, but relief still some months away

22 May 2012

Singapore, May 22, 2012 -- Moody's Investors Service says that Tata Steel's (Ba3 stable) Q4 2012 results showed a moderately improving trend from the previous quarter as input costs, especially those of coking coal, declined more rapidly than the 3.5% fall in average steel prices. Accordingly, Moody's believes that the company's previous Q3 FY12 results marked the recent nadir in margins, when a surge in raw material prices and slower demand for steel in Europe combined to reduce margins, and led to the Group reporting a net attributable loss of USD118 million for that period. By contrast, Q4 FY12 saw Tata Steel return to a net profit of USD85 million, bringing the full year's net profit to USD1,060 million. The trend seen in the last quarter, if continued, would be supportive of Tata Steel's ratings, which were becoming more vulnerable to a deterioration of its overall financial performance caused by its European businesses.

In 2012, we expect global steel demand to grow by less than the 6% seen in calendar year 2011, driven by slower growth in China and less demand from Europe. Tata Steel is expecting India's demand for steel to grow by 7% in 2012 after the relatively weak growth of 4% in 2011.

While sales of Tata Steel's European operation, Tata Steel Europe (TSE, B2 negative), declined to 14million tonnes in FY12, they could be lower still in FY13 as a large blast furnace is relined and upgraded. By contrast, the Indian operations are working flat out and have the benefit of captive iron ore activities. The new 3 million tonne per annum (mtpa) plant at Jamshedpur is now partially operational and should roll 1 million tonnes of steel in FY2013.

In FY2012, Tata Steel's consolidated reported EBITDA margin was 10%, down from 14% in FY2011. Total EBITDA of USD2.66 billion exceeded capex incurred of USD2.4 billion. Gross debt reduced by USD150 million over the year ending at USD11.77 billion, while the Group maintains good liquidity with USD2.4 billion of cash and cash equivalents. EBITDA/interest on an unadjusted basis fell from 4.3x in FY11 to 3.2x in FY12, which is marginal for the rating range.

Tata Steel is pushing on with the 6mtpa Greenfield integrated steelworks in Odisha at an estimated total cost of USD6.8 billion, where initial production could start in FY14. Approximately USD750 million of the total USD4.4 billion cost for Phase 1 (3 mtpa) of the project has been spent and Group capex of USD2.5 billion is anticipated in FY13, primarily for this project.

TSE improved EBITDA/tonne from -USD46/t in Q3 FY12 to USD8/t in Q4. This was assisted by a sharp inventory reduction with TSE selling 250,000 tonnes more steel than it made, as plants were mothballed, compared to 270,000 tonnes of "over-production" in Q3. The 520,000 tonne swing supported the cash flow even though the average selling price of the finished steel was USD1,132/t in Q4, lower than the USD1,191/t recorded in Q3. Overall, Group gross debt reduced by USD626 million in Q4, after including the benefit of a 4.3% appreciation of the INR.

The squeeze on operations outside India is also apparent when looking at the changes in capital employed between December 2011 and March 2012. Capital employed in all the Group's steel businesses declined by INR77million, but within the standalone Indian entity, the overall capital employed in the steel business increased by INR23.3 billion or USD458 million.

"Another lurch downwards in European demand would not be helpful for Tata Steel in the short-term and would pressure the subsidiary's rating (B2, negative)," says Alan Greene, Vice President-Senior Credit Officer at Moody's, and lead analyst for both Tata Steel and TSE. "TSE's EBITDA will remain volatile but broadly positive until the over-capacity in Europe is resolved. Meanwhile, TSE continues to drive productivity and cost reduction measures in order to maintain its position", Greene adds.

Moody's outlook for Tata Steel going forward is cautiously supportive of its credit profile. The Group will benefit from increasing Indian output which should deliver EBITDA of over USD300/t and move the Group average comfortably above USD100/t. At the same time, the Benga mine in Mozambique, where Tata Steel has a 35% stake, is shipping coking coal in the next few months and this can be used by either TSE or TSL. The Group's ratings reflect the underpinning Tata Steel provides to TSE in terms of its capacity, and its track record of past support in this respect. Apart from TSE, the biggest risk to Tata Steel is from the Indian economy in terms of slower growth and high inflation which are not the ideal backdrop for new capacity additions. At present, India is a net importer of steel, but once this cushion goes the dynamics of the industry could change markedly. Conversely, a weaker Rupee would support competitiveness in export markets.

Alan Greene
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: (852) 3758 -1350
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Philipp L. Lotter
Associate Managing Director
Corporate Finance Group
JOURNALISTS: (852) 3758 -1350
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Moody's: Tata Steel's Q4 2012 an improvement, but relief still some months away
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