Fitch downgrades Tata Steel group, puts it on rating watch

Even as two of its rivals reacted positively to Tata Steel's plans to sell British operations, Fitch Ratings today downgraded the company and long-term foreign currency issuer default rating to 'BB' from 'BB+/stable' and placed it on rating watch evolving.
The downgrade is on Tata Steel and also Tata Steel UK, the rating agency said in a late evening note.
Fitch also downgraded unsecured notes issued by the domestic steel major to 'BB' from 'BB+' and placed them on the rating watch. It also downgraded the long-term foreign currency of Tata Steel UK Holdings to 'B' from 'B+/Stable' and placed it on rating watch list.

Fitch's rivals Moody's and S&P had positively commented on the Tatas plan to exit loss-making UK operations.
"The downgrade reflects the decline in the company's profitability and jump in leverage during FY16, following challenging market conditions for its operations in India and overseas, especially in Britain.
"The downgrade of British operations reflects the downgrade of parent and the weak operating environment there and more broadly across Europe," Fitch said.

The rating watch reflects uncertainty following the company's announcement on March 29 to revamp operations in Europe, including potential sale of its British operations, in part or in whole.
"Considerable uncertainty remains on timing and how the Group and its debt will be structured going forward. We believe sale of British operations will result in a change to the Group's ratings," Fitch said.

Explaining the rationale for its actions, Fitch said the company's domestic profitability is weak. Consolidated EBITDA per tonne declined to about Rs 7,400/tonne in the first nine months of FY16 from Rs 11,400/t in FY15.
Domestic steel demand has been tepid at 4.7 per cent in the said period which was met largely by a 29 per cent increase in imports. Though 20 per cent safeguard duty on steel imports has been of some help, prices are still about 20 per cent lower than the average for FY15.
Similarly, its European operations are under stress with EBITDA losses in Q2 and Q3 of FY16, hit by weak show in UK. Price realisation in Europe has faced pressure from cheap Chinese and Russian imports amid weak demand.

On top of it the company has seen a major jump in leverage. Fitch estimates the company's consolidated net debt to EBITDA leverage will jump to 11.6 times in FY16, from 5.8 times in the previous year, due to poor profitability.
The company, however, will benefit from the commissioning of the first phase of its greenfield plant at Kalinganagar in Odisha having a capacity of 3 million tonne.
The rating outfit sees its sales volume dipping 8 per cent in FY17 due to lower steel production in UK.