Tata Steel shares in focus as Fitch ups rating to ‘BBB-, assigns ‘stable’ outlook

Tata Steel shares: Tata Steel, Fitch said, would replace its blast furnaces with more cost-efficient and environment-friendly electric arc furnace (EAF)-based steelmaking capacity.

SUMMARY

• Tata Steel’s Indian operations derive almost 100 per cent of iron ore and 22 per cent of coal requirements through the company’s mines
• Tata Steel’s strong cost base in India grants it a significant competitive advantage amid volatile steel prices, underpinning its credit profile
• Fitch expects Tata Steel’s consolidated sales volumes to rise 2 per cent in FY24 after falling in FY23 due to lower sales in Europe

Shares of Tata Steel Ltd will be in focus on Tuesday morning after Fitch Ratings its issuer default rating (IDR) to ‘BBB-‘ from ‘BB+’ while keeping its outlook ‘stable’. Fitch Ratings said it has also upgraded the rating on ABJA Investment’s (Tata Steel arm) $1billion notes due in July next year to ‘BBB-‘ from ‘BB+’. The notes are guaranteed by Tata Steel.

The upgrade, Fitch Ratings said, follows a revision in Tata Steel’s standalone credit profile to ‘bb+’, from ‘bb’, on the reduction in uncertainty and financial risk from its UK operations.

Tata Steel, Fitch said, would replace its blast furnaces with more cost-efficient and environment-friendly electric arc furnace (EAF)-based steelmaking capacity. This will help competitiveness in the UK operations cost to improve, Fitch said adding that Tata Steel’s IDR continues to benefit from a one-notch uplift from potential support from the Tata group.

Tata Steel’s SCP also factors in the robust global cost position of its other assets, especially in India where it has significant raw-material sufficiency, Fitch said.

“We expect Ebitda leverage to decline over the next three years on higher capacity, output and Ebitda. Tata Steel aims to roughly double its capacity in India by 2030, but we think risks to its financial profile are mitigated by its focus on maintaining net debt/EBITDA, based on its calculations, of 2 times or lower,” the rating agency said.

Fitch Ratings noted that UK assets are currently a weak link in Tata Steel’s portfolio in terms of cost position, with a reported Ebitda loss of around 130 million British pound in FY23.

“TSL’s plan to install EAF-based steelmaking capacity of 3 million tonnes per annum (mtpa) at Port Talbot, UK, within the next three-four years should allow the UK business to generate a profit even during industry downturns, instead of being a drag on TSL’s financial performance. TSL expects an improvement of GBP150-170/tonne (t) in its cost base in the UK following the capacity transformation, which is significantly higher than the unit loss in FY23,” Fitch Ratings noted.

To recall, the UK government agreed to fund up to 500 million British pound, or roughly 40 per cent, of the planned capex of 1.25 billion British pound. Tata Steel, on the other hand, could cut its workforce significantly, incurring restructuring costs.

Tata Steel’s Indian operations derive almost 100 per cent of iron ore and 22 per cent of coal requirements through the company’s mines, and its plants in Kalinganagar and Jamshedpur are among the lowest-cost assets in the world, Fitch Ratings noted.

“Tata Steel’s strong cost base in India grants it a significant competitive advantage amid volatile steel prices, underpinning its credit profile,” Fitch said.

The rating agency expects Tata Steel’s consolidated sales volumes to rise 2 per cent in FY24 after falling in FY23 due to lower sales in Europe. Volume growth in FY24 may be led by the ramp-up of operations at Neelachal Ispat Nigam, which was acquired in FY23, to close to its 1 mtpa capacity.

“We expect volume to jump by 6 per cent in FY25 and 7 per cent in FY26, driven by the Kalinganagar expansion,” Fitch said.

It estimated Tata Steel Ebitda leverage would decline to 2.5 times by FY26, and further thereafter, from 2.9 times in FY24 and 2.8 times in FY23.

With Thanks Reference to: https://www.businesstoday.in/markets/company-stock/story/tata-steel-shares-in-focus-as-fitch-ups-rating-to-bbb-assigns-stable-outlook-401302-2023-10-10