India Ratings and Research (Ind-Ra) today maintained Tata Steel's (TSL) long-term issuer rating of IND AA on 'rating watch evolving' (RWE) on delay in formation of Tata Steel's joint venture with ThyssenKrupp and clarity on its impact on the consolidated financial profile.
The RWE indicates the possibility of TSL's ratings being upgraded, downgraded or affirmed, Ind-Ra said in a statement here.
TSL's MoU with ThyssenKrupp to form a JV carving out European operations, and Tata Steel UK's pension liability settlement are the major steps towards strengthening of TSL's business and financial profile, the rating agency said.
"However, the ratings have been maintained on RWE awaiting a definitive agreement on the JV formation and further clarity on its likely impact on the consolidated financial profile," it added.
Ind-Ra said that it has taken a consolidated view of TSL for arriving at the ratings. The rating approach factors in a one notch uplift for its strong operational and strategic link ages with the Tata Group.
The agency said the MoU with ThyssenKrupp is among the key rating drivers and it is a step in the right direction to restructure the group's structurally weak European operations, which historically posted substantially lower and volatile operating margins.
The proposed 50:50 JV will pare about EUR 2.5 billion of debt from TSL's consolidated financials as the JV debt is proposed to have no recourse to TSL and the JV will be accounted under equity method, according to Ind-Ra.
The European operations reported EBITDA of EUR 0.62 billion during the trailing 12 months ended September 2017.
The JV MoU provides for a non-cash business combination of two entities leading to flat steel sales capacity of 21 million tonnes.
The agency said while the carving out of the European operations substantially improves TSL's business profile, net leverage may marginally increase with related acquisition debt remaining with the intermediate holding companies.
TSL separated itself from the British Steel Pension Scheme by making a settlement payment of British pound 550 million and issuing a 33 per cent stake in Tata Steel UK in Q2 FY18.
"This resolution is likely to aid and provide pace to limit exposure to the company's European operations," it said.
TSL is India's third largest steel producer with crude steel production capacity of 12.7 million tonnes per annum (mtpa). It also has overseas production capacity of 14.6 mtpa spread over the Netherlands, the UK, Singapore and Thailand.
Ind-Ra said Tata Steel's domestic operations are well integrated with captive mining operations which meet 100 per cent and 36 per cent of its iron ore and coal requirements, respectively.
As a result of the integrated operations, Tata Steel is among the low cost steel producers in the country, it added.
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