Tata Steel can withstand 20% drop in EBITDA over next 2 years: S&P Global

High growth investment to limit Tata Steel's debt reduction plan

"The ratings on most Asian steelmakers can withstand a 20 per cent decline in earnings before interest, tax, depreciation and amortisation (EBITDA) from our expectations over the next two to three years," S&P Global Ratings said on Tuesday.

In its report on Asian Steelmakers, the agency said the region’s steel players have good credit standing in the capital market along with strong banking relationships. “These strengths can help these companies meet any large refinancing need in a weaker operating environment,” it said.

Tata Steel, Posco, Nippon Steel and Hyundai Steel among others have been rated by S&P Global as adequate under liquidity assessment and rating buffer if EBITDA falls by 20 per cent. 

However, the rating buffer could start to diminish significantly if EBITDA drops further, said the report.

Meanwhile, higher growth investments may limit debt reduction for select Asian steel producers such as Tata Steel, said S&P Global.

"We expect debt of steel companies to increase in 2019, but it will be largely driven by Tata Steel and Nippon Steel as both companies are adding capacity in India," said the report.

Tata Steel added about 6 million tonne per annum capacity in calendar 2018 by acquiring stressed assets for a net consideration of about $5.5 billion. 

Similarly, Nippon Steel plans to acquire Essar Steel Ltd. in collaboration with Arcelor Mittal. The total investment for the Essar Steel acquisition is likely to be about 760 billion yuan, and Nippon Steel is likely to incur about half of the cost.

With India's GDP likely to grow nearly 7 per cent annually over the next two to three years, the agency sees continued healthy demand for steel in the country. 

Tata Steel, under its strategy of focusing on the Indian market, targets to double capacity in the country over the next five years from 12 million tonne currently.

Also, over next two years, leverage of most Asian steel companies including Tata Steel is unlikely to increase as these companies have completed most of the capacity expansion and efficiency improvement projects they undertook since the last downturn in steel prices.

Tata Steel has doubled its capacity since 2015 with its three million tonne Kalinganagar expansion and the acquisition of stressed assets in India. The company's Europe operations are more efficient after the sale of the weaker parts of the UK operations. 

Tata Steel's focus on India and its healthy cash flows owing to its strong upstream integration support its leverage. The company's equity raising of $2.0 billion in 2019 should also help to contain its debt, said S&P Global.