Fitch affirms Tata Steel outlook stable

Rating agency says firm's highly profitable India operations are improving its financial position

Fitch today reaffirmed its BB+ rating as well as 'stable' credit outlook for Tata Steel saying its highly profitable India operations are improving the company's financial position.

Tata Steel's financial profile has been improving, and reflects its expanding Indian operations, which are highly profitable along with its stable European performance, Fitch Ratings said. BB+ refers to non-investment rating.

"Tata Steel's net leverage improved to 4.6x at end of FY14 from 4.9x at FY13-end, and Fitch expects net leverage to further decrease to below 4x by FY16. The company plans to commission the first phase of its new plant at Odisha in mid-2015, which will also support stronger earnings. The first phase of the six million tonnes (MTPA) per annum Odisha plant will add three MTPA of capacity," Fitch said in a statement.

It further added that company's deleveraging during FY15 is likely to be impacted by the temporary halt of Tata Steel's iron ore mining operations during third quarter of FY15.

"The suspension hurt its profitability during 3Q FY15; its EBITDA/tonne fell to Rs 9,294 compared with over Rs 15,000 during H1FY15," it said.

However with most of the company's mines resuming operations, Fitch expects profitability to increase and support the improvement in its financial profile, it said.

On European operations, the rating agency said the performance of Tata Steel UK Holdings (TSUKH) has remained firm with stable volumes of 9.86 million tonnes during M9FY15.

"The profitability of the European operation, however, improved, which resulted in higher EBITDA of Rs 32.3 billion in M9FY15 compared with Rs 21.9 billion a year earlier," it said.

It added that it expects the European operation to maintain its performance during FY16, driven by its expectations of modest improvement in market conditions for western European steel producers, the company's on-going cost cutting measures and improving product mix.

It also added that while TSUKH benefits from Tata Steel's support, company's ratings continue to benefit from Tata Group support.

"Fitch's key assumptions within our rating case for the issuer include completion of TSL's greenfield expansion during FY16 that will support volume growth of over 10 per cent during the next three years, stable European operations and continuing weak steel prices with the hot-rolled coil benchmark price of around USD 450 per tonne over the next two years and stable USD/INR exchange rate of 62," the agency said.