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Business News/ Companies / Stronger profitability seen for Tata Steel on new UK plant: Moody’s
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Stronger profitability seen for Tata Steel on new UK plant: Moody’s

The UK subsidiary may see stronger profitability because of doubling of output of heat-treated rails

The new plant will more than double Tata Steel UK Holdings’s annual output of heat-treated rail to 125,000 tonnes from 55,000, which will secure the company’s position in the resilient rail infrastructure market, the Moody’s note said. Photo: AFPPremium
The new plant will more than double Tata Steel UK Holdings’s annual output of heat-treated rail to 125,000 tonnes from 55,000, which will secure the company’s position in the resilient rail infrastructure market, the Moody’s note said. Photo: AFP

Mumbai: Tata Steel UK Holdings Ltd (TSUKH), which opened a new heat treatment plant at its Hayange factory in France, may see stronger profitability because of doubling of output of heat-treated rails, a Moody’s Investors Service note said on Monday.

“The new plant will more than double TSUKH’s annual output of heat-treated rail to 125,000 tonnes from 55,000, which will secure the company’s position in the resilient rail infrastructure market," the note, authored by Alan Greene, vice president-senior credit officer, Moody’s Investors Service, said. “Increased deliveries of high-grade steel will strengthen TSUKH’s profitability."

TSUKH, which generates around 55% of Tata Steel’s revenue, could show better operating margins in the fiscal year ending 31 March, Moody’s said.

“In the quarter ended June, TSUKH’s Ebitda (earnings before interest, tax, depreciation and amortization) margin was 4%, compared with 31% for Tata Steel India," the note said. “In fiscal 2013, Tata Steel India had an Ebitda margin of 31% and TSUKH’s margin was 1%, reflecting TSUKH’s higher shipments and capacity utilization and a £200 million reduction of its controllable costs."

The new plant comes at a time when Network Rail, which owns and operates UK rail infrastructure, chose earlier this month to source more than 95% of its rail requirements from Tata Steel until 2019, with an option to extend until 2024. The deal involves supplying up to 1 million tonnes and several hundred million pounds in revenue.

However, the note cautioned that the company’s free cash flow and its debt are likely to continue being a worry.

“Whereas a turnaround in TSUKH would benefit Tata Steel’s profitability, we expect Tata Steel’s free cash flow to remain negative in the coming quarters owing to ongoing capex in India and a build-up of working capital brought on by higher production in Europe," it said. “This will limit Tata Steel’s ability to reduce its growing adjusted debt, which rose to 5.4x Ebitda in fiscal 2013 from 3.8x in fiscal 2011."

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Published: 28 Oct 2013, 02:12 PM IST
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