Moody’s upgrades Tata Steel to Ba1 from Ba2; stable outlook

Rating agency Moody’s Investors Service has upgraded the corporate family rating of Tata Steel Ltd to Ba1 from Ba2. The rating outlook remains stable.

The upgrade to Ba1 reflects Tata Steel’s conservative financial policies, which combined with Moody’s expectations of strong operating performance throughout fiscal 2022, will contribute to further deleveraging and balance sheet strengthening.

Moody’s expects the company to reduce gross debt by at least a third — or by around $5.8 billion by March 2022 from March 2020 levels. The upgrade reflects the rating agency’s expectation of moderate financial leverage and ample interest coverage for Tata Steel in a normalised steel price environment due to significant debt reduction in 2021.

Tata Steel’s adjusted leverage declined to an estimated 2.1x at June 2021 from 6.5x at March 2020, and will wane further to 1.5x at the end of this fiscal year on the back of current positive dynamics for the steel industry. Over time, Moody’s forecasts the company’s leverage will track within 1.5x-2x and free cash flows to remain positive even as the annual capex reaches $1.5 billion.

Kaustubh Chaubal, a Moody’s vice president and senior credit officer said, “We expect the company’s leverage — measured by consolidated debt/EBITDA to decline to 1.5x by March 2022 from 6.5x at March 2020, 3.3x at March 2021 and an estimated 2.1x at June 2021.”

“We project the company will continue to generate large and positive free cash flow from operations over the next 12-18 months because of supportive commodity prices, steady product spreads amid likely persisting strong steel demand,” adds Chaubal who is also Moody’s lead analyst on Tata Steel.

Moody’s forecasts for Tata Steel are based on the rating agency’s current price sensitivities for steel ($800 per ton for the Indian operations and $930/ton for Europe) for fiscal 2022.

The forecasts are also based on the mid-point of Moody’s price sensitivity range for the period beyond ($600-$800/ton). These price sensitivities translate into an EBITDA/ton assumption of $350 for fiscal 2022 and $230 thereafter for the Indian operations.

The Ba1 CFR is supported by Tata Steel’s large global operations spread across India and Europe. The company’s strong position in India is reflective of its large scale and strong brand reputation, Moody’s Investors Service said in its note

In addition, its cost-competitive, vertically integrated operations with in-house production of key raw materials help to keep its profitability high in the industry. These credit strengths underpin the company’s strong market position as one of India’s leading steelmakers.

The upgrade reflects the rating agency’s expectation of moderate financial leverage and ample interest coverage for Tata Steel in a normalized steel price environment due to significant debt reduction in 2021.

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