CARE Rating upgrades Tata Steel's credit outlook; stock nears record peak

Tata Steel's focus on the growing India market, highest exposure to high-priced flat products, and full iron ore integration till CY30, makes it an attractive long-term play, say analysts

Shares of Tata Steel moved higher by 4.4 per cent to Rs 1,242 on the BSE in the intra-day trade on Friday, supported by heavy volumes, after rating agency CARE Rating revised the company's long-term credit rating to "stable outlook" from "negative". The stock of the Tata Group Company was trading close to its record high level of Rs 1,247, touched on May 12, 2021.

"The revision in rating and outlook assigned to the instruments of Tata Steel Limited (TSL) factors in the improvement in performance witnessed during FY21, sequentially from Q2FY21 onwards, particularly in Indian operations, on the back of revival in demand and increased steel prices leading to substantial cash flow generation and sizeable deleveraging at the end of FY21 resulting in improvement in debt coverage indicators," CARE Ratings said in detailed rationale.

While TSL's European operations reported operating losses for whole of FY21, they have witnessed improvement in profitability (from loss to profit) during Q4FY21, largely on the back of significantly higher steel prices along with lower coking coal prices, which has more than offset the sharp increase in iron-ore prices. Given the current price trend in Europe, the European operations are envisaged to report operating profit in near future as well, the rating agency said.

That apart, Centrum Broking believes that with improved profits from European operations in FY22E, Tata Steel’s Ebitda (earnings before interest, taxes, depreciation, and amortization) could grow 95 per cent in FY22 to Rs 59,600 crore before falling to Rs 40,600 crore in FY23 with softening of steel prices.

"However, by the end of FY23, we see net debt declining around Rs 49,300 crore to Rs 34,300 crore, with Net debt/EBITDA of 0.8x, the lowest since Tata Steel took over Corus in December 2006," the brokerage firm said in company update.

That said, Tata Steel’s focus on the growing and profitable India market, highest exposure to high-priced flat products (flats/longs of 80/20), and full iron ore integration till CY30, makea it an attractive long-term play, say analysts.