S&P Global Ratings has revised Tata Steel higher to “BB-” from “B-” on expectation of substantial decline in debt over the next two years due to strong cash flow and the company’s intention to reduce debt.

Tata Steel’s adjusted debt to decline by about 30 per cent by March 2023 from the March 2020 level of about ₹1-lakh crore. The stable outlook reflects expectation that Tata Steel will adequately deleverage over the next two years and build comfortable headroom at the current rating level, said the rating agency.

About half of the decline in debt is expected to be delivered in this fiscal 2021. Tata Steel has committed to reducing absolute debt levels by at least $1 billion per year from FY’22, even with revised capital expenditure of about ₹9,000 crore per year, up from ₹5000-6000 crore in FY’21.

Also read: Moody’s revises Tata Steel outlook to ‘stable’ from ‘negative’

‘Debt substitution’

“We believe Tata Steel will moderate its investment plans, if required, so as to meet this objective,” it said. Recent equity raising of about ₹3,300 crore and working capital improvements of about ₹12,000 crore. However, we treat as debt substitution some of Tata Steel’s working capital-related debt reductions in fiscal 2021, such as ₹6,000 crore in exportadvances and securitisation of receivables at Tata Steel Europe (with a facility size of £475 million),” it said.

This implies a comparatively lower level of deleveraging compared with the company’s reported numbers, it said.

Tata Steel has guided to price increases of ₹6,000- 7,000 per tonne in the March quarter, on the back of already high prices and margins in the third quarter. Steel prices could moderate over the next two to three years as output ramps up globally following disruptions due to Covid-19. Long product prices in India have already moderated following the resumption of smaller capacities, it said.

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