Tata Steel numbers to improve on India ramp-up, UK operations rejig: Moody’s

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NEW DELHI: Moody’s Investors Service today said greenfield expansion of Tata Steel operations in India and expected restructuring of UK operations improve earnings, but kept its ratings unchanged.

The global ratings agency in February downgraded credit ratings of Tata Steel by two notches to Ba3 from Ba1 on a weaker than expected operating performance in its key operating markets of India, Europe and South-East Asia on account of persistently weak steel prices.

“Ratings on Tata Steel (Ba3 negative) and Tata Steel UK Holdings (B3 negative) remain unchanged at this point in time despite their weak operating results for the full year ended March 2016,” Moody’s said in a statement.

Tata Steel reported consolidated revenue of Rs 1,172 billion and consolidated underlying EBITDA of Rs 79 billion, down 16 per cent and 39 per cent, respectively, from a year ago.

“… the results for the quarter ended March 2016 showed a substantial improvement over the previous trailing quarter with consolidated revenue and EBITDA of Rs 295 billion and Rs 23 billion, an increase of 5 per cent and 171 per cent respectively,” it said.

The improvement in the operating performance was a result of the general uptick in global steel prices in February and March, after an all-time drop in January.

“We estimate consolidated adjusted leverage of 8.7x at March 2016, slightly below the peak of 9.0x at December 2015. Looking ahead into 2016-17, we expect leverage to correct towards 6.5x-7.5x,” said Kaustubh Chaubal, Moody’s Vice-President and Senior Analyst.

Tata Steel’s reported gross debt of Rs 862 billion at March 2016 rose by only Rs 55 billion from March 2015 levels despite capital expenditure of Rs 115 billion and weak operations during the year.

“The proposed sale of the long products business to Greybull Capital (unrated) and the company’s intention to sell its UK business are credit positive, although there is no immediate impact on our ratings or outlook,” said Chaubal.

“The divestment of the loss-making operations will reduce the drag on the European business’ profitability which has been under strain for a while although much is unknown about the divestment contours, including debt and pension liabilities to be transferred, which in particular will drive the impact, if any.”

Tata Steel’s India business revenues and underlying EBITDA of Rs 382 billion and Rs 74 billion were down 9 per cent and 27 per cent, respectively, from last year’s.

Its European operations reported revenue of Rs 674 billion and underlying EBITDA loss of Rs 6 billion, down 16 per cent and 115 per cent, respectively, for fiscal 2016.

Moody’s said, “In our view, continuing protectionist measures are imperative, especially as global steel oversupply prevails, exerting pressure on prices globally.”

It viewed the extension of the safeguard duty for three years until 2019 from an initial 200 days, the imposition of an minimum import price (MIP) on some 173 grades of steel imports and a possible anti-dumping duty as a reflection of continuing support for the ailing steel sector.

In Europe, Moody’s expects the European Union’s (EU) anti-dumping duties on steel imports from China and Russia to provide some support to steel prices.

It said increase in Tata Steel India’s production with the commissioning of 3 mtpa greenfield expansion at Kalinganagar, which started commercial production in May 2016, a higher proportion of value added products in its product basket and the expected completion of the restructuring of Tata Steel Europe will drive earnings expansion and lead the path towards leverage correction.

“We will watch out for the progress on the UK business divestments; clarity on divestment of liabilities, including pensions and erasing the negative EBITDA impact of the UK facilities on Tata Steel UK Holdings’ (TSUKH) credit metrics would be critical for any change in outlook to the TSUKH ratings,” it said.

For a change in its outlook on Tata Steel to stable, the rating agency said it would need to see that domestic steel prices continue on a recovery path and Tata Steel shows a substantial improvement in profitability other than improvement in operating and credit metrics.