S&P upgrades Tata Steel's long-term issuer rating to 'BB' from 'BB-'

Standard and Poor's has upgraded Tata Steel Ltd's long term issuer rating from "BB-" to "BB" on significant expected deleveraging.

The outlook on ratings is stable and reflects the view that the company can adequately deleverage to reduce volatility in credit metrics during industry downturns.

S&P also raised the long-term issue rating on the senior unsecured notes issued by its subsidiary ABJA from "BB-" from "BB".

Continued strength in steel prices has accelerated the company's deleveraging, S&P said in a statement. In the base case scenario, Tata Steel's adjusted debt is expected to decline by over 30 per cent by March 2023 from its March 2021 levels.

Tata Steel's adjusted debt (including customer advances and securitised receivables etc) will fall to about Rs 60,000 crore by March 2023 from about Rs 91,500 crore as of March 2021. This would significantly outperform the stated intention to reduce debt by at least $ 1 billion per year, and continue the trend of declining debt from March 2020. The company had a debt of Rs 1.1 trillion in March 2020.

While the company has increased capital expenditure (capex), the increase is still small in relation to the operating cash flows and does not affect the path of deleveraging.

"We expect capex of about Rs 11,000 crore annually, up from about Rs 7,000 crore in fiscal 2021," it said. The agency expects the company's EBITDA of Rs 1 trillion and free operating cash flow of Rs 35,000 crore–Rs 40,000 crore, respectively, over fiscals 2022 and 2023. This is despite assumption of a 10 per cent decline in steel prices in fiscal 2023 from the current levels.

The commissioning of the ongoing 5 million tons per year capacity expansion at the Kalinganagar facility will significantly strengthen the credit profile over the next three to four years. This is especially so since the facility will be added without material debt. It will improve Tata Steel's profitability with accompanying cold-rolled mill and pellet plant facilities also being set up.

In addition, the company's European operation is expected to be EBITDA positive in the forecast period, despite its contribution to the group's overall earnings being small, the rating agency added.