Ratings agency Standard and Poor's (S&P) today raised Tata Steel's long-term corporate credit rating a notch to 'BB' with a stable outlook on the back of the company's sound financial profile and strong cash flows.
"S&P's Ratings Services said today that it had raised the long-term corporate credit rating on India-based Tata Steel to 'BB' from 'BB-'. The outlook is stable," the ratings firm said in a statement.
A 'BB' rating suggest moderate default risk.
Meantime, the rating firm has affirmed 'B+' long-term corporate credit rating and 'B' short-term rating on Tata Steel’s European subsidiary, Tata Steel UK Holdings (TSUKH) with a stable outlook.
"We raised the rating on Tata Steel because we expect the company to sustain the improvement in its cash flow protection measures in the current financial year. We anticipate that Tata Steel's cash flows will further improve in FY13 due to the commissioning of brown field expansion," Standard & Poor's credit analyst Mehul Sukkawala said.
He also said that S&P had revised company’s financial risk profile to 'significant' from 'aggressive' due to its deleveraging measures and higher cash flows.
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Deleveraging occurs when the debt component in the balance sheet is reduced through fresh equity infusion or through sale of assets to part repay the debt amount.
The credit rating agency said Tata Steel’s deleveraging measures in the last fiscal has offset negative working capital issues and improved its liquidity.
"In the past seven months, the company has raised $2.8 billion through deleveraging measures, which has improved company’s liquidity. We believe the company will use the enhanced liquidity to fund capital expenditure and repay its debt," Sukkawala said.
He also said that Tata Steel was expected to maintain its improved operating performance in the current fiscal because of its strong integrated Indian operations.
Referring to margins, S&P said they were likely to remain at about 35% on the back of good domestic demand.
"Strong operating performance in India will help offset the operating performance of Tata Steel’s European operations, which were weak despite improving during last fiscal," Sukkawala said.
S&P said higher cash flows from the steel firm’s Indian operation or any equity infusion or monetisation of some asset to reduce debt or improvement in operating environment in Europe in the future would see higher rating for the steel company.