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Fitch downgrades Tata Steel and UK arm

Agency places both entities on Rating Watch Evolving

BS Reporter & PTI  |  Mumbai 

A bus is reflected in a Tata sign outside their offices in London
A bus is reflected in a Tata sign outside their offices in London

Fitch Ratings on Friday downgraded Tata Steel and its wholly-owned subsidiary Tata Steel UK Holdings from stable rating earlier on the back of decline in profitability and jump in leverage during FY16, following challenging market conditions for its operations in India as well as overseas, especially in the UK.

The agency has also placed both the entities on Rating Watch Evolving (RWE), it said in its report.

The RWE reflects uncertainty following Tata Steel's announcement that it is exploring all options for portfolio restructuring in Europe, including the potential divestment of its UK operations, in part or in whole. Considerable uncertainty remains on timing and how the group and its debt will be structured going forward.

Fitch believes Tata Steel's disposal of its UK operations, in part or whole, will result in a change to the company's ratings.

Profitability of Tata Steel's domestic operations has been impacted by weak steel price realisation in nine-months ended December. Its consolidated EBITDA per tonne declined to about Rs 7,400/tonne in the period under review from Rs 11,400 per tonne in FY15, hit by a Rs 7,150 per tonne fall in realisation.

Steel producers globally are suffering from weak demand and overcapacity, with current global capacity utilisation at a low last seen during the 2008 global financial crisis. In India, demand growth was a tepid 4.7 per cent in nine-months ended December, which was met largely by a 29 per cent year-on-year increase in imports.

The recent supportive moves by the Indian government by imposition of a minimum import price following a 20 per cent safeguard duty on imports to protect domestic manufacturers, have provided some relief, with domestic steel prices from January 2016 lows. However, prices are still about 20 per cent lower than the average for FY15.

Fitch says increased competition among domestic producers to support utilisation rates will likely constrain further price hikes in the near term, given domestic steel capacity is scheduled to jump about 15 million tonnes over Oct-Mar 2015 and 2016.

For the Kalinganagar plant in the domestic market, Tata Steel is currently commissioning the first phase of this greenfield and expects to gradually increase output in FY17. Apart from increased sales, the company would benefit from improved product mix from the new plant, as the plant will specialise in producing high-grade flat products. It will also be one of the most cost-efficient plant in the country. The bulk of the capex has been completed and the company should begin deriving cash-flow benefits in FY17, said Fitch.

Amid fears that 15,000 jobs may be lost, the UK on Friday said it will appoint independent advisors once the sale of Tata Steel's UK business commences and, alongwith the Welsh government, help in securing a buyer for the country's largest steelmaker.

Government also assured the workers that "all possible" ministerial, official and diplomatic influence will be exerted to secure the steel industry's long term future.

"Business Secretary Sajid Javid will today visit Port Talbot, where Tata Steel UK's largest plant is based, to meet workers and the management," UK government said in a statement.

Tata Steel, one of the flagship firm of the over USD 100 billion Indian conglomerate Tata Group, earlier this week disclosed plans to sell its entire UK business.

The move has threatened over 15,000 jobs amid a deepening crisis in the UK's once-storied sector that the Indian conglomerate had entered nearly a decade ago with a USD 14-billion takeover with much fanfare.

"He (Javid) will say that once formal Tata sales process is underway, independent advisors will also be appointed by the government," the statement said.

It added that as Prime Minister David Cameron has already said, the UK government intervention helped ensure that Tata announced a sales process for Port Talbot, rather immediate closure allowing ministers to play an active part in finding a sustainable solution, including engaging with market for potential buyers.

"Javid will work with Commercial Secretary to the Treasury Jim O'Neill, Chancellor of Duchy of Lancaster Oliver Letwin and Welsh Secretary Alun Cairns as well as Welsh Government in helping secure a buyer for Tata's Steel assets following their announcement of their intention to divest their UK assets," the statement added.

During his visit to Port Talbot, Javid will also meet the members of the Welsh Government, unions and local MPs.

On his visit, the Business Secretary said: "I'm going to Port Talbot to meet staff and management, who are understandably extremely anxious about their future.

"I will listen to them, and I want to reassure them myself that the government is on their side in working hard to achieve a long term solution for them, for the region and for the wider UK steel industry."

He further said: "Whilst we can't change the status of the global steel market, we can and are playing a positive role in securing a sustainable future."

The government said the measures imposed in January on reinforcing steel bar imports are starting to have effect as imports during the months declined 99 per cent from January 2015.

Tata Steel, which operates UK's biggest steel plant at Port Talbot in south Wales, is losing 1 million pounds (USD 1.4 million) a day in its UK operations.

Tatas had entered the British steel sector, which once dominated the British economy, in early 2007 with acquisition of Anglo-Dutch steelmaker Corus after a fiercely fought takeover battle -- which till date remains the biggest ever overseas acquisition by an Indian group.

First Published: Sat, April 02 2016. 00:31 IST