Moody's affirms Tata Chemicals' Ba1 CFR; outlook stable

Moody's Investors Service has affirmed Tata Chemicals Limited's (TCL) Ba1 corporate family rating (CFR). The outlook remains stable.

RATINGS RATIONALE

"The rating affirmation reflects our expectation that the improving trend in TCL's operating and financial metrics will be sustained over the next 12-18 months," says Kaustubh Chaubal, a Moody's Vice President and Senior Credit Officer.

"The divestment of its fertilizer business has significantly improved TCL's liquidity and provides it with the requisite financial resources to invest in higher-margin businesses, namely the consumer and specialty businesses," adds Chaubal, who is also Moody's Lead Analyst for TCL.

TCL's fertilizer business (including discontinued operations) accounted for around 28% of consolidated revenues for the fiscal year ending March 2017 (FY2017), but for only 18% of the consolidated EBIT. As such, Moody's views the divestment of the relatively low-profitability fertilizer business as a credit positive, and expects the company's consolidated EBIT margins will reach 15%-16% going forward compared to 11.6% in FY2016.

TCL's Ba1 CFR continues to reflect its leading position in the global soda ash market and strong position in the soda bicarbonate and salt businesses. Moreover, its competitive cost structure -- especially for soda ash produced in the US and in Kenya -- results in the generation of stable margins.

Looking ahead, Moody's expects continued positive free cash flow generation, even as the company's capital expenditure remains elevated at $150-$180 million each year.

As a result, Moody's expects TCL's credit metrics will continue to improve, with leverage -- as measured by adjusted debt/adjusted EBITDA -- comfortably below 3.0x over the next 12-18 months.

Meanwhile, the reduction in the company's gross debt will reduce its interest expenses which, coupled with rising EBITDA, should strengthen EBITDA/interest coverage towards 8.0x over the next 12-18 months.

The Ba1 CFR also incorporates a one-notch uplift to reflect Moody's expectation of extraordinary support from its parent Tata Sons, if needed.

The company's relatively small global scale and the inherent cyclicality of the soda ash business remain key constraining factors for the Ba1 CFR.

The stable outlook reflects Moody's expectation that TCL will sustain revenue growth across its businesses while maintaining its leading position in the global soda ash industry.

The stable outlook also incorporates our expectation that TCL will remain strongly positioned within its rating category, supported by the divestment of its fertilizer business and strengthening credit metrics.

The deployment of divestment proceeds towards investments in EBITDA accretive businesses that also improve TCL's scale and business mix will be key for a higher rating.

Specific credit metrics indicative of upward pressure on the rating include adjusted leverage of 2.0x-2.5x and retained cash flow (RCF)/adjusted debt of at least 25%.

The CFR could be downgraded if weaker industry conditions pressure the company's earnings, with its EBITDA margins falling below 18%.

Other credit metrics that could lead to a lower rating include adjusted leverage exceeding 4.0x-4.5x, EBITDA/interest coverage weakening below 4.0x, or RCF/adjusted debt falling below 15%, all on a sustained basis.

Any revision in Moody's expectation of support from Tata Sons could prompt a review of the one-notch uplift in the Ba1 CFR.

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