Standard & Poor's revises ratings on Tata Steel upwards

It expects that the company's performance will improve over the next three years

Anticipating operating performance of Tata Steel to improve in next three years, Standard & Poor's Ratings Services today revised its outlook on the steel major to stable from negative earlier.

"Our outlook revision reflects our expectation that Tata Steel's operating performance will improve over the next three years," said Standard & Poor's credit analyst Vishal Kulkarni in a statement.

The agency anticipates that the completion of the first phase of Tata Steel's Orissa greenfield project will generate positive free operating cash flow starting fiscal 2016.

This, it said, will also raise its production capacity in India to 3.5-4 million tonnes over the next three years.

Standard & Poor's, which also revised ratings of Tata Steel UK to stable from negative earlier, said the company's high-margin India operations will boost operating performance. Tata Steel's India unit is the best-performing operations of the country and it 8.5 million tonnes capacity now.

"... We expect the company to gradually strengthen its operating performance in Europe with the improving economic environment in the U.K. And eurozone. We believe Tata Steel will moderate its growth strategy for the next two years to improve its financial position. The company does not plan to immediately start the second phase of the Orissa project after commissioning the first one," it said.

Tata Steel also recently completed strategic measures such as the sale of a 50% stake in Dhamra port and a parcel of land in suburban Mumbai. These transactions would improve the company's financial position after the negative impact of the rupee depreciation in the past 12 months, it said.

The agency expects that the company would be able to manage its large debt maturities based on its strong banking relationships and access to capital markets.

"The stable outlook reflects our expectation that Tata Steel will be able to improve its operating performance through higher steel output in India and lower capital expenditure," he said.

The rating agency warned that it might lower Tata Steel's rating on issues such as significant delay in commissioning of the Orissa project and significant rupee depreciation.

"We are unlikely to raise the rating in the next 12-18 months. Nevertheless, we may raise the rating if we expect Tata Steel's operating performance to improve more than our forecast or if the company undertakes significant strategic measures to reduce leverage ...," it said.