Tata Steel rose 1.77% to Rs 1432 after S&P Global Ratings raised its long-term issuer credit rating on the company and its subsidiary ABJA Investment Co. to 'BB' from 'BB-', while maintaining stable outlook.
The ratings agency had also raised the long-term issue rating on the senior unsecured notes issued by ABJA to 'BB' from 'BB-'.Offering rating rationale, S&P Global Ratings said that management's commitment to deleverage, supported by above-average strength in steel prices, helps Tata Steel to accelerate debt reduction.
It estimates Tata Steel's adjusted debt to fall to about Rs 600 billion by fiscal year ending March 2023 in its base case, from about Rs 915 billion as of March 2021.
This would significantly outperform the company's stated intention to reduce debt by at least $1 billion per year, and continue the trend of declining debt from March 2020, when the company reported Rs 1.1 trillion in debt.
While the company has resumed some growth in capital expenditure (capex), the increase in capex is still small in relation to the operating cash flows and does not affect the path of deleveraging. S&P Global expects capex of about Rs 110 billion annually, up from about Rs 70 billion in fiscal 2021.
In its base case, the ratings agency forecasts the company's EBITDA and free operating cash flow of about Rs 1 trillion and Rs 350 billion to Rs 400 billion, respectively, over fiscals 2022 and 2023.
This is despite the assumption of a 10% decline in steel prices in fiscal 2023 from the current level. S&P Global said that deleveraging should improve resilience of Tata Steel's credit metrics through the steel price cycle. It expects the company's ratio of funds from operations (FFO) to debt to remain above 25% even at mid-cycle prices, a level at which it estimates the company's EBITDA per metric ton to be about half the current level.
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Furthermore, it estimates Tata Steel's FFO-to-debt ratio at about 15% at the bottom of the steel cycle, well above the 6% the company reported in fiscal 2020.
S&P Global also believe the commissioning of the ongoing 5 million tons per year capacity expansion at the Kalinganagar facility will significantly strengthen the company's credit profile over the next three to four years. This is especially so since the facility will be added without material debt and will improve Tata Steel's profitability with accompanying cold-rolled mill and pellet plant facilities also being set up.
In addition, the ratings agency expects the company's European operations to be EBITDA positive in the forecast period, although its contribution to the group's overall earnings will be small.
The stable outlook reflects S&P Global's view that Tata Steel can adequately deleverage to reduce volatility in credit metrics during industry downturns. The stable outlook also reflects continued favorable financial policies, especially toward leverage.
Tata Steel Group is among the top global steel companies with an annual crude steel capacity of 34 million tonnes per annum. It is one of the world's most geographically-diversified steel producers, with operations and commercial presence across the world.
On a consolidated basis, the steel major reported a net profit of Rs 6644.15 crore in Q4 FY21 as against net loss of Rs 1481.34 crore in Q4 FY20. Net sales during the quarter increased 39.4% year-on-year (YoY) to Rs 48950.89 crore.
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