Tata Steel upgraded to ‘BBB-’ by Fitch ratings on easing UK risk, outlook remains stable

In the wake of alleviating risk from UK Operations, the Issuer Default Rating (IDR) of Tata Steel was upgraded to ‘BBB-’ from ‘BB+’ by Fitch Ratings on Monday. 

The upgrade came after Tata Steel Limited's standalone credit profile (SCP) was revised to ‘bb+’ from ‘bb’. The revision was made on the account of the reduction in uncertainty and financial risk from its UK operations. 

Fitch Ratings expects that Tata Steel's UK operations' cost competitiveness will improve in the coming months. The company will replace its blast furnaces with more cost-efficient and environment-friendly electric arc furnace (EAF)-based steel making capacity. 

“We expect EBITDA leverage to decline over the next three years on higher capacity, output and EBITDA. TSL aims to roughly double its capacity in India by 2030, but we think risks to its financial profile are mitigated by its focus on maintaining net debt/EBITDA, based on its calculations, of 2.0x or lower,” said Fitch Ratings on Monday.

Key factors that led to improvement of Tata Steels ratings

Signals of increase in UK Profitablity was the major highlight in Fitch's rating remark for Tata Steel. TSL's plan to install EAF based steel making capacity of 3 million tonnes per annum (mtpa) at Port Talbot, UK, within the next three-four years is expected to generate profit for the industry even during industry downturns, hightlighted Fitch in its report.

Other than improving profitibality of its UK unit, TSL's strong cost base in India will prove to be a major boost for the company. The company is expected to push its capital expenditure in the coming years. 

“TSL's average annual capex over FY24-FY26 to be around 30% higher than the FY23 level of INR141 billion (FY22: INR105 billion),” stated Fitch in its report. Other than capex pus, TSL's consolidated sales volume is also expected to rise by 2% in FY24 after falling in FY23 due to lower sales in Europe.

Other than this, Fitch expects Tata Steel's EBIDTA leverage to decline 2.5x by FY26, and further thereafter, from 2.9x in FY24 and 2.8x in FY23. Due to this, TSL's lower leverage with EBITDA growth and Tata Group's Support the company is expected to perform well in the coming years. The Tata Group owns a 34% stake in TSL.