Singapore, March 31, 2021 -- Moody's Investors Service has changed the outlook on Tata Steel
Ltd. to stable from negative. At the same time, Moody's
has affirmed the company's Ba2 corporate family rating (CFR).
"The rating affirmation and outlook change to stable are driven
by a solid recovery in Tata Steel's operations in the third quarter
of 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," said Kaustubh Chaubal, a Moody's
Vice President and Senior Credit Officer.
"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 US$1 billion each year and prioritizing
deleveraging over capital expenditure," adds Chaubal who is
also Moody's lead analyst on Tata Steel.
RATINGS RATIONALE
India's (Baa3 negative) steel consumption declined by 55%
during the first quarter of fiscal 2021 (Q1 fiscal 2021) following a nationwide
lockdown during the COVID pandemic. However, since the opening
up of the economy in June 2020, pent-up demand from end-user
industries -- in particular automotive, white goods
manufacturing, construction and infrastructure --
have boosted steel consumption, containing the annual steel consumption
decline to only about 11%.
Moody's estimates shipments for Tata Steel Indian operations (TSI)
during fiscal 2021 will stay largely flat. 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 have propelled TSI's record profitability in recent
quarters. TSI's profitability has steadily improved to its
10-year high of INR18,948 EBITDA/ton (US$253) during
Q3, from INR4,969 (US$66) in Q1 fiscal 2021.
Moody's forecasts a long-term sustainable EBITDA/ton of INR13,200
(US$176) 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.
Moreover, the company's backward linkages with entire iron
ore needs met from captive sources provide resilience to profitability
even if steel prices were to severely fall.
In contrast, Moody's estimates shipments at Tata Steel's
European operations (TSE) will decline by about 10% during fiscal
2021 and for profitability to gradually recover. Europe's
economic activity was affected by further lockdowns and a seasonally weak
winter quarter, although it has improved since the early months
of the pandemic.
Moody's estimates TSE generated an EBITDA/ton (adjusted for unusual
items) of INR2,370 (US$32) in Q3, compared with consistent
losses in the preceding three quarters of fiscal 2021. Given the
volatile trajectory in TSE's historical profitability, Moody's
remains cautious in its forecasts and assumes TSE will just about break
even in fiscal 2022. In addition, TSE's sizable 10.0
million ton (mt) capacity causes major swings to Tata Steel's consolidated
metrics.
Tata Steel's consolidated financial metrics remain vulnerable to
its volatile and fragile European operations, which have weighed
on the company's credit profile and rating for a sustained period.
That said, the highly profitable TSI, now comprises two-thirds
of Tata Steel's group shipments, up from 61% in fiscal
2019 and 48% in fiscal 2018, somewhat reducing the drag on
consolidated credit metrics.
Tata Steel's public stance in reducing gross debt by at least $1
billion each year supports its credit quality. By March 2021,
Tata Steel's Moody's adjusted consolidated gross debt (including interest
bearing customer advances which are considered debt) would reduce by at
least $2.7 billion from a year prior. In this regard,
the company's equity raising of $480 million following its
first and final call in February on its partly paid equity shares will
help to reduce debt.
Moody's estimates Tata Steel's consolidated debt/EBITDA leverage
should track comfortably below 4.0x as of March 2021 due to the
EBITDA expansion and gross debt reduction, and continue improving
further. More importantly, Moody's regards the leverage
improvement through gross debt reduction as a structural shift in the
company's financial policy and a credit positive, especially
with its stated goal of prioritizing debt reduction over capital expenditure.
Tata Steel's Ba2 CFR continues to reflect the company's large global scale
with operations spread across India and Europe; its strong market
position in India; and its globally cost-competitive steel
operations in India, a function of its vertical integration with
in-house production of key raw materials. The CFR continues
to incorporate a one-notch uplift reflecting Moody's expectation
of extraordinary distress support from its parent Tata Sons Ltd.,
should the need arise.
The CFR also takes into consideration the weak performing TSE that will
remain a drag for a while on consolidated metrics, as well as the
company's exposure to the cyclical steel industry.
OUTLOOK
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 4.0x over the next 12 months, indicating
levels supportive of a Ba2 CFR.
The stable outlook also incorporates the expectation that Tata Steel will
prioritize debt reduction over capex with an annual gross debt reduction
of at least $1 billion.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATING
Upward ratings pressure could build if Tata Steel further strengthens
its position in key operating markets and successfully reduces the drag
of its loss-making European operations on consolidated credit metrics.
A reduction in gross debt levels, aligned with the company's
stated objectives of prioritizing deleveraging over capex, would
support a positive bias to the rating. Financial metrics supportive
of a higher CFR include leverage lower than 4.0x and EBIT/interest
coverage greater than 3.5x; both on a sustained basis.
A downgrade is unlikely in the near term, given the recent improvement
in performance. However, Moody's would consider downgrading
the ratings in case of a sharp shift in industry conditions, resulting
in declining sales volumes and lower pricing and profitability.
Metrics indicative of a downgrade include leverage above 5.5x,
EBIT/interest coverage below 2.0x and EBIT margins below 10%.
Downward ratings pressure could also build if the company undertakes large
debt-financed acquisitions without an immediate and meaningful
counterbalancing effect on earnings, sustaining higher leverage.
Execution risks related to the timely and seamless integration of the
acquired business could also pressure the ratings.
PRINCIPAL METHODOLOGY
The principal methodology used in this rating was Steel Industry published
in September 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1074524.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
Tata Steel Ltd. is a leading steel producer with manufacturing
facilities in India (19.3 mt), in Europe - the UK
(3 mt) and the Netherlands (7.0 mt), and in Southeast Asia
(2.4 mt). The company is in the process of divesting the
Southeast Asian operations. The UK and the Dutch operations are
housed under Tata Steel UK Holdings Limited.
Tata Steel generated revenues of INR1,348 billion (USD17.9
billion) and EBITDA of INR227 billion (USD3.0) billion during the
12 months ended December 2020.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and
sensitivity analysis, see the sections Methodology Assumptions and
Sensitivity to Assumptions in the disclosure form. Moody's
Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
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Kaustubh Chaubal
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
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Ian Lewis
Associate Managing Director
Corporate Finance Group
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