Tata Steel hits all-time high; stk soars 25% in a month on ratings upgrade

Shares of Tata Steel hit an all-time high of Rs 924.25 as they rallied 6 per cent on the BSE in intra-day trade on Thursday. The stock surpassed its previous high of Rs 924 touched on October 29, 2007. In the past one month, the Tata group company has rallied 25 per cent after the global rating agencies upgraded the outlook on Tata Steel to stable, citing a recovery in Q3 of the financial year 2020-21 (Q3FY21).

On Tuesday, March 6, Standard and Poor’s raised the credit rating of Tata Steel and its subsidiary ABJA Investment Co from ‘B+’ to ‘BB-' on deleveraging and strong operating momentum. Tata Steel's debt level is expected to decline materially in the next two years due to a strong cash flow and the company's stated intention to reduce debt.

"In our base case, we expect Tata Steel's adjusted debt to decline by about 30 per cent by March 2023 from the March 2020 level of about Rs 1 trillion, leading its credit metrics to steadily improve. The stable outlook reflects our expectation that Tata Steel will adequately deleverage over the next two years and build comfortable headroom at the current rating level," it said in its rating action.

Moody's also, recently, revised the outlook on Tata Steel from 'negative' to 'stable' on the company’s solid recovery in operations in Q3FY21. 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 the 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.

In the past six months, the stock has zoomed nearly 150 per cent as compared to a 24 per cent rise in the S&P BSE Sensex. The recovery in the global and Indian economy has led to a sharp improvement in steel demand in India. The investments in infrastructure and recent policy developments, to drive economic growth, should drive steel demand in India.

"After a sharp drop in April-June quarter (Q1FY21), the domestic steel industry has reported a rebound in margins in the September 2020 (Q2FY21) and December 2020 (Q3FY21) quarter, benefiting from improving demand and realisations on the one hand and softer coking coal costs on the other hand. Margins of steel companies are expected to show further expansion in the March quarter of FY21 driven by healthy export order and higher realisations," CARE Ratings said in a recent steel sector update.