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April 14 (The following statement was released by the rating agency)
Fitch Ratings has affirmed the Long-Term Foreign Currency Issuer Default Rating (IDR) on India-based Tata Steel Limited (TSL) at 'BB+'. The agency has also affirmed the 'B+' Long-Term Foreign Currency IDR on TSL's wholly owned subsidiary Tata Steel UK Holdings Limited (TSUKH). The Outlooks have been revised to Stable from Negative. A full list of rating actions is provided at the end of this commentary.
The Outlook revision reflects Fitch's expectations of improvement in TSL's financial profile in the near to medium term.
KEY RATING DRIVERS
TSL's Financial Profile to Moderate: Fitch expects TSL's financial profile to moderate with net leverage (measured as net adjusted debt/ operating EBITDAR) improving to below 4x by the year ending 31 March 2015 (FY15) (FY13:4.9x and FY14 forecast at below 4.5x). Fitch expects TSL's strong cash generation to support the deleveraging over the medium term. This is even though debt levels are likely to peak in FY15 as the company expands its capacity in India.
TSL's EBITDA improved to INR114bn (USD1.9bn) in 9MFY14 from INR82.9bn a year earlier, driven by growth in its Indian sales volumes and improved profitability in the European business. Fitch expects both sales volume growth and stronger profitability to be sustainable. The commissioning of the first phase of its new plant at Odisha in 4QFY15 will also support stronger earnings. The first phase of the new plant is expected to add 3 million tonnes per annum (mtpa) of capacity.
Improvement in European operations: The performance of TSUKH has improved over the last four quarters with the company consistently generating positive EBITDA. For the nine months to December 2013, EBITDA was GBP233m, a strong improvement from GBP18m a year earlier. Fitch's expectation of a sustained improvement in TSUKH's profitability is underpinned by the modest improvement in market conditions for western European steel producers and TSUKH's on-going cost rationalisation measures and improving product mix.
TSUKH's Weakness Offset by TSL Support: In line with Fitch's Parent and Subsidiary Rating Linkage methodology, the agency has raised TSUKH's IDR by two notches above its standalone credit profile as a result of moderately strong operational and strategic ties between TSUKH and its parent TSL. TSUKH's standalone credit profile is weak, evidenced by high leverage and weak profitability. In addition, its business has been challenged by difficult, though improving, market conditions in western Europe.
Assets Sales Support Capex: TSL has undertaken measures to control its rising debt levels. In March 2014, the company sold a land parcel in Mumbai for INR11.55bn. Fitch believes that the company is likely to divest additional assets, which will help fund its capex and constrain TSL's debt levels. The company is also expected to delay work on the second phase, which has capacity of 3mtpa, at its Odisha plant in India. The company now plans to start the second phase after commissioning and ramping up the first phase.
Weaknesses in Indian Market: Fitch expects demand growth for steel in India to remain muted in the near term and improve modestly from the second half of FY15. The agency does not expect the profitability of Indian steel companies to improve significantly given the likely overcapacity in the industry over the medium term. While TSL's Indian operations continue to remain highly profitable, supported by its high level of raw material integration, any significant and sustained drop in steel prices may have a negative impact on the performance of the consolidated entity.
Tata Group Support: TSL's ratings continue to benefit from a one-notch uplift because of the potential support from the Tata group due to the former's strategic importance to the group.
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- Net financial leverage of more than 4x on a sustained basis
- Any weakening of linkages of between TSL and the Tata group
- Any significant weakening in TSUKH's liquidity
- Any weakening of linkages between TSL and TSUKH
Positive: Future developments that may, individually or collectively, lead to positive rating action include:
- Significant improvement in net financial leverage to below 2.5x on a sustained basis, coupled with sustained profitable operations at TSUKH would be positive for the Foreign-Currency IDR.
- Net leverage of 5x or less and EBITDA interest cover of 2x or above on a sustained basis
- Any strengthening of linkages between TSL and TSUKH
The full list of rating actions follows:
Long-Term Foreign Currency IDR affirmed at 'BB+'; Outlook revised to Stable from Negative
Senior unsecured rating: affirmed 'BB+'
Long-Term Foreign Currency IDR affirmed at 'B+'; Outlook revised to Stable from Negative
Secured bank facilities aggregating around GBP3.6bn affirmed at 'BB-' with Recovery Rating of 'RR3'.