Shares of Tata Steel Ltd will be in focus on Tuesday morning after Moody's Investors Service, betting on India operations, upgraded the Tata group firm to an investment grade, with a aBaa3 long-term issuer rating, and revised its outlook to 'Stable' from 'Positive'. The rating upgrade came amid expectations of the continued strength in Tata Steel's credit profile due to its solid market position in the domestic market and factors in investments in building new capacity in India and Europe. Moody's Senior Vice President, Kaustubh Chaubal, said his agency expects Tata Steel's profitability to rise even as softer steel prices hurt revenues.
The second-largest steel market, India, would be a key driver of the company's credit profile, as steel consumption climb at a 7 per cent cumulative annual growth rate until 2030, fuelled by continuous, large infrastructure investments as well as increasing demand from the auto sector, Moody's said.
Even as substantial capital expenditure continues, Tata Steel would still generate large free cash flow, enabling debt reduction with consolidated debt/Ebitda leverage comfortably below 2 times–2.5 times over the next two financial years, Moody's said.
"The upgrade also reflects the company's considerable deleveraging through gross debt reduction and our expectation that Tata Steel will maintain conservative financial policies with a well-balanced capital allocation and financial metrics appropriate foritsBaa3 rating," adds Chaubal, also a lead analyst on Tata Steel.
In a note, Chaubal said the upgrade also reflects Tata Steel's considerable deleveraging through gross debt reduction and Moody's expectation that the steel maker would maintain conservative financial policies with a well-balanced capital allocation and financial metrics appropriate for its Baa3 rating.
To recall, Tata Steel recently entered deal with the UK government on decarbonising of its 3 million tonne per annum (mtpa) steel plant at Port Talbot. Tata Steel would be getting 500 million British pounds in grant from the UK government to invest in Electric Arc Furnace (EAF) steelmaking and the total capital cost of the project is estimated at 1.25 billion pounds.
While one-off restructuring costs may need to be incurred, the EAF will transform its cost position in the UK, and the BF closure will arrest the significant drain to earnings, Moody's said adding that it would be a credit positive.
"The likely improvement in its UK cost structure and the relatively better performing Dutch operations will ensure, in
Moody's view, Tata Steel's credit profile remaining solid, even as steel prices remain soft and global steel demand
weakens amid rising interest rates and a weak economic outlook in most end-user markets," Moody's said.