S&P downgrades Tata Steel, keeps outlook stable

Mumbai: Standard & Poor’s (S&P) has lowered its long-term corporate credit rating on Tata Steel as it expects stress on cash flow for the steelmaker in the next 12 to 24 months because of lower prices, competition and weaker profitability.

The rating has been cut to BB- from BB though S&P kept the outlook stable.

“We also lowered our issue rating on the company’s guaranteed senior unsecured notes to ‘BB-’ from ‘BB’. ABJA Investment Co. Pte. Ltd. issued the notes,” S&P said on Wednesday.

Credit analyst at S&P Vishal Kulkarni said the firm has lowered its assessment of Tata Steel’s financial risk profile to highly leveraged from aggressive to reflect the company’s weakened cash flow leverage ratios.

Tata Steel has a consolidated debt of ₹ 71,798.36 crore as on 30 September 2015.

“Subdued demand and low steel prices have kept operating performance weak at Tata Steel’s India and European operations. We expect the company’s operating performance to improve, but only gradually, beginning in fiscal 2017 (year ending 31 March, 2017),” the rating firm said.

Profitability at Tata Steel’s backward integrated India operations has suffered because of a more than 40% drop in the average selling prices of steel in the domestic market over the past 18 months. The rating firm expects the company’s debt to remain high and operating cash flows to remain negative until fiscal 2018.

Tata Steel’s European operations continue to face tough operating conditions even as it is in exclusive talks with Greybull Capital Llp to sell its long products business there. “We expect Tata Steel’s financial risk profile to approach the stronger end of the highly leveraged category over the next two years. The gradual recovery in profitability at the India operations and stability at the European operations will support the improvement in financial ratios,” it said.

Kulkarni said the stable outlook reflects the firm’s expectation that Tata Steel’s operating performance will gradually recover over the next 12-15 months. The firm cautioned that it could lower the rating if the improvement in Tata Steel’s operating performance is weaker than anticipated.

“Ebitda per tonne stagnating below ₹ 8,000 at the India operations will likely result in such weakness in operating and financial metrics,” it said.

No asset class has had it as bad in 2015 as commodities. Economies and firms have struggled to stay afloat as prices have fallen to unforeseen levels. The credit of commodity-linked firms has become one of the biggest risk in global markets.

With an additional 3 million tonnes in capacity going on stream in 2016, Tata Steel is trying to sell this incremental supply without hurting margins. In Europe, it is crucial for Tata Steel to find a buyer for its long steel business.

Tata Steel’s European unit reported a loss of ₹ 139 crore at the Ebitda level. The Tata Steel management has often (and most recently during an investor presentation in September) said that much of the stress in Europe is in the UK market. The European steel market has been under pressure due to weak demand and growing volume of cheaper imports.

According to Tata Steel’s investor presentation, demand in Europe is expected to grow by 1.5% in 2015, but importers will continue to be the biggest beneficiaries. The gloom in the European markets has also forced the company to take multiple impairments. The latest was in November—a ₹ 8,669 crore write down on the value of some of its European factories.