S&P Global Ratings has revised Tata Steel’s outlook from ‘stable’ to ‘positive’ to maintain strong cash flow while reassuring its ‘BBB-‘ rating.
The Tata Group company is expected to generate substantial free operating cash flow over the next two years as steel prices continue to rise. The resilience of the company’s credit metrics has also strengthened with the steel price cycle following a significant reduction in debt over the past 18 months. S&P estimates that the Ebitda (interest, tax, devaluation and earnings before repayment) ratio from Tata Steel’s adjusted debt will be below 2.5x below the cycle.
“So we have TataSteel and its affiliate ABJA Investment Co. We are revising our rating outlook on Pte. Ltd. from stable to positive. At the same time, we are confirming our ‘BBB-‘ long-term issuer credit ratings in both companies and the ‘BBB-‘ long-term issue rating on senior unsecured notes issued by ABJA, “the rating firm said in a statement. Make a note on Friday.
The positive outlook reflects the prospect of TataSteel upgrading over the next 12-24 months if the company continues to reduce leverage and improve its resilience to the steel price cycle, it says.
Tata Steel’s strong free operating cash flow over the next two years will strengthen its credit profile. It is estimated that the company will generate $ 3-4 billion in free operating cash flow over the next two years due to continued strength in steel prices. “This is an average of around Rs 20,000 based on our EBITDA / ton estimates for Indian activities over the next two years. This is about 40% higher than the normal level in the past, ”the S&P note said.
In the absence of increased investment or return of shareholders, cash flow will help further reduce debt. Tata Steel aims to increase its capacity in India to 40 million tonnes by 2030 from about 25 million tonnes at the end of FY24. The company has hinted that it may accelerate some capital expenditures in view of the current state of the steel industry.
“Even under such circumstances, we believe that Tata Steel’s credit metrics will be strong, although the pace of liquidation may be slower than in the last 18 months. Also, the scale increase without increasing material debt will increase the company’s credit profile in the long run, ”it said.
As of March 31, 2022, Tata Steel’s adjusted debt has decreased by about 45% from about Rs 1.1 trillion a year ago. The reduced debt and positive operating outlook should keep the debt-to-debt ratio above operations at 75% over the next two years.
At the normal level of steel prices, it is estimated that the company’s Ebitda will be around Rs 14,000 per tonne, whereas S & P’s base case was Rs 19,000-23,000.
With an adjusted debt-to-Ebitda ratio of 1x as of March 31, 2022, the company has declined sharply in a short period of time, to about 6.6x as of March 31, 2020.
“We expect Tata Steel’s credit metrics to remain above our upgrade trigger, even if steel prices return to normal over the next two years. However, cushions remain limited against unforeseen debt-funded investments and the steel price recession. Therefore, the company’s continued commitment to work at low leverage will be the key to high ratings, ”it said.