Moody's upgrades outlook on Tata Steel to stable, cites recovery in Q3

Agency affirms Corporate Family rating 'Ba2', says company will continue recovering after demand slump last year

Moody's has revised the outlook on Tata Steel Ltd from “negative” to “stable” on the company’s solid recovery in operations in the third quarter of current fiscal year (Fy21).

The global rating agency affirmed the company's Ba2 corporate family rating (CFR). The company will sustain the improvement over 12-18 months, enabling its consolidated financial metrics to recover to levels more appropriate for its Ba2 CFR, it said.

"The rating action also reflects the company's proactive financial management amid the [Covid-19] pandemic. It has publicly stated target of reducing gross debt by at least $1 billion each year and prioritising deleveraging over capital expenditure,” said Kaustubh Chaubal, Vice President and Senior Credit Officer at Moody's.

India's (Baa3 negative) steel consumption declined by 55 per cent during the first quarter of fiscal 2021 (Q1 fiscal 2021) after a nationwide lockdown to contain Covid-19. After the economy opened in June 2020, pent-up demand from end-user industries like automotive, white goods manufacturing, construction and infrastructure have boosted steel consumption. This has contained the annual steel consumption decline to only about 11 per cent.

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 Rs 18,948 EBITDA/ton ($253) during Q3, from Rs 4,969 ($66) in Q1 fiscal 2021. Moody's forecasts a long-term sustainable EBITDA/ton of Rs 13,200 ($176) for fiscal 2022 for TSI, constituting a 30 per cent 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 per cent 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.