S&P rates Tata Steel stable

Standard & Poor's Ratings Services (S&P) on Tuesday affirmed its 'BBB' corporate credit rating on Tata Steel, terming the outlook to be stable.

At the same time, Standard & Poor's affirmed its 'BBB' rating on Tata Steel's $500 million equivalent seven-year senior unsecured bank loan facility.

"The ratings on Tata Steel are supported by its position as one of the lowest cost steel producers in the world, its increased geographical diversity and its broader product mix," said Anshukant Taneja, credit analyst with Standard & Poor's.

Tata Steel derives its cost competitiveness from its integrated business and improved operating efficiency through modernising facilities and introducing innovative processes.

In addition, its acquisitions of Singapore's NatSteel and Thailand's Millennium Steel widen its manufacturing base in South-East Asia. Overseas revenues accounted for one-third of the total in the financial year of 2006, Standard & Poor's said.

"The rating on Tata Steel also benefits from the company's moderate financial profile and robust domestic demand for steel, which is expected to expand 7 to 8 per cent a year," Taneja said.

Tata Steel is exposed to cyclical steel prices, resulting in some unpredictability in its earnings. Although prices have recovered in recent months, hot-rolled coil (HRC) prices dropped to about $410 per tonne over April 2005 to December 2005, from an average $595 in January 2005. The decline in HRC prices was due to excess production, especially from China.

Domestic competition is also increasing, as domestic players pursue expansions and international companies plan to set up facilities in India.

Tata Steel is also undertaking various expansion projects, exposing the company to project completion risk, as any delay in commissioning may have an adverse impact on its cash flows and debt repayment abilities.