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Moody's ups Tata Steel, Tata Steel UK Holdings outlook to stable

Absence of large capital expenditure will improve free cash flow generation and allow de-leveraging

Aditi Divekar  |  Mumbai 

Tata Steel. Photo: Reuters
Tata Steel. Photo: Reuters

Moody's Investors Service has revised ratings outlook on and UK Holdings (TSUKH), from negative to stable. "The change in the ratings outlook from negative to stable reflects our expectation that the benign operating environment and recovery in the financial performance of TSUKH and over the last few quarters, will continue over a longer term, leading to a sustained improvement in its metrics," said Kaustubh Chaubal, a Moody's vice president and senior analyst, the agency reported. Strong prospects - in particular, in its key operating markets of India, and - with apparent slated to grow, amid capacity removals in China, bode well for Moody's expects China's capacity to continue declining, with the government's implementation of supply-side reforms and environmental protection measures. These measures have forced the closure of inefficient mills, prompted consolidation which has led to a decline in Chinese As for demand, Moody's expects India's to grow in the mid-single digits in 2017 and 2018, on the back of economic activity with expected in the range of 7.3 per cent to 7.5 per cent. Besides, implementation of the goods and services tax (GST) in July would help the organised sector, and the main beneficiaries would be strong brand recall players like Tata Steel, said the agency. In - which is Tata Steel's second largest market by volume - sustained demand from key user industries, such as automotive, construction and capital goods, will lead apparent to grow by an estimated 2 per cent in calendar 2017 and by 1.5 per cent in 2018. As a result, consolidated Ebitda/tonne will average at Rs 7,500 - 7,900 in FY2018, higher than the stable outlook trigger of Rs 7,000. Moreover, with half the sales volumes from the highly profitable India (TSI) - that generates Ebitda/tonne in the Rs 10,000 - Rs 12,000 range - will drive a meaningful improvement in consolidated earnings.

The absence of any large and investment needs, will improve free cash flow generation and allow deleveraging. Following Tata Steel's signing of the memorandum of understanding (MoU) with Thyssenkrupp AG in September, Moody's expects to enter into a definitive agreement for a joint venture (JV) of its European business by March 2018 and its subsequent consummation by March 2019. The transaction is at an early stage with a possible closing, which is subject to due diligence, approvals from respective shareholders and antitrust authorities. Moody's view that will maintain a cautious approach when evaluating expansions or potential acquisitions, is what pushed this change in the ratings outlook. Large debt-funded investments, if any, could weigh on the ratings. That said, given the significant improvement in operating and financial metrics, there is sufficient headroom under the ratings. In light of the significant improvement in operating and metrics, upward ratings pressure is likely to build over the next 12-18 months.

First Published: Mon, November 06 2017. 18:40 IST
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