Tata Steel can acquire NINL without sacrificing rating headroom: S&P

Tata Steel's debt is expected to continue to decline over the next two years, despite the Rs 12,100 crore deployed for the acquisition of NINL

Rating agency Standard and Poor’s (S&P) said Tata Steel can acquire Neelachal Ispat Nigam Ltd (NINL) without sacrificing rating headroom due to deleveraging over the past 18 months and strong cash flow from high steel prices.

Tata Steel's (BBB-/Stable/--) debt is expected to continue to decline over the next two years, despite the Rs 12,100 crore deployed for the acquisition of state run NINL. However, the pace of deleveraging will be slow in the year ending March 2023.

The company's adjusted debt is estimated to decline by about 5 per cent in FY23 versus a nearly 20 per cent decline expected earlier due to the acquisition, all else remaining the same. Its ratio of funds-from-operations to debt is likely to decline to about 40 per cent from an expected 45-55 per cent range earlier. This is well above the 25 per cent downgrade rating trigger.

The rating agency said it has assumed average steel prices in FY23 to be about 10 per cent lower year-on-year. This may result in a 20-25 per cent year-on-year decline in EBITDA/tonne at its key Indian operations. NINL is unlikely to materially affect FY23 earnings.

Tata Steel has indicated the potential for growth capital expenditure (capex) at NINL with plans to build a 4.5 million tonnes per annum (mtpa) long products facility in the next few years. This will expand to 10 mtpa by 2030.

In the base case estimates, free operating cash flow is expected to be about Rs 15,000 crore in FY24. This assumes a further 20-25 per cent decline in EBITDA/tonne over FY23 and annual capex of about Rs 10,000 crore. The ongoing 5 mtpa flat products expansion, the main growth project, will also be complete by end 2023, providing room for further growth.

S&P said that in announcing the NINL acquisition, Tata Steel reiterated its intention to balance deleveraging and growth priorities. The potential expansion will improve Tata Steel's business profile by increasing scale of operations and by strengthening its market position in long steel products. NINL's iron ore reserves of about 100 million tonnes will also enhance operational efficiency, it added.