Moody's revises Tata Steel's rating outlook to negative from stable

Tata Steel UK Holdings' ratings changed to stable from positive

Rating agency Moody’s on Friday revised Tata Steel’s rating outlook to negative from stable. The rating actions reflect the persistent weakness in global steel prices — led by China's economic slowdown — and the resulting negative impact on the credit profiles of Tata Steel and its UK operations, Moody's said.

“Our rating actions are premised on a near-term increase in global demand for steel being unlikely, and as such, a material recovery in steel prices remains a low probability,” the agency said quoting Kaustubh Chaubal, vice-president and senior analyst as saying.

India's steel imports were up 42 percent by volume in the April-September period as compared to  the same period last year. As a result, Indian hot rolled coil prices (HRC) fell 37 percent, leading to company's domestic realisations/tonne falling about 18 percent to Rs 40,853. Tata Steel's India operations' year-on-year EBITDA/tonne fell more sharply by 43 percent to Rs 8,418.

However, Moody's expects the government of India's imposition of a 20 percent safeguard duty -- effective from 14 September 2015 and levied for a period of 200 days -- on certain categories of HRC imports to have a modest impact on prices for the rest of FY16.

In Europe, steel prices have also fallen sharply, due to persistent overcapacity in the region, and high levels of cheaper imports, particularly from China; Tata Steel's European operations reported a 77 percent drop in its EBITDA/tonne at Rs 649 for April-September, predominantly because of an EBITDA loss in September quarter.

"Moody's rating actions result from the weakening in Tata Steel's and Tata Steel UK operating performance and debt protection metrics, and our expectation that a continued contraction in earnings will be evidenced, given the challenging conditions facing the global steel industry, and in particular, Tata Steel's key markets of India and Europe," added Chaubal.

Also, while Tata Steel India's backward integrated operations continue to help in sourcing 100 percent of its iron ore and 40 percent of its coking coal requirements, the benefit is somewhat diminished, because of low raw material prices and the increasing cost of mining in India, due to contributions to the District Mineral Foundation that have increased mining costs.

Moody's expects EBITDA/tonne to increase by Rs 500-800 per tonne for the remainder of FY16, and to rise gradually by 1-3 percent in FY17.

With industry high profitability, Tata Steel's domestic operations currently accounts for close to 80 percent of Tata Steel's consolidated EBITDA, although forming only a third of overall shipments. Moody's expects domestic operations' contribution to consolidated EBITDA to rise even further with the 3 mtpa Kalinganagar operations from Q4 FY2016 leading to some moderation in consolidated leverage.

The agency said overcapacity in Europe, a weak price environment and cheap imports will continue to pressure profitability and keep leverage at elevated levels. Furthermore, with Tata Steel's UK Holdings inability so far in finding a buyer for the long products business, there is limited upward rating bias. Moody's has therefore revised its ratings outlook to stable from positive.

Negative ratings pressure on Tata Steel UK Holdings is unlikely over the near term given the support it receives from Tata Steel. However, a further deterioration in market conditions in Europe or the operations' inability to return its EBITDA to positive over the next six months could result in a ratings downgrade. Any revision in our support assumptions from Tata Steel could also lead to a downgrade, said Moody's.