India Ratings and Research has upgraded Tata Steel’s long-term issuer rating to ‘IND AA+’ from ‘IND AA’ with a stable outlook.

The upgrade reflects Ind-Ra’s expectation that, despite likely aggregate capex of about ₹22,000 crore, TSL’s consolidated adjusted net leverage would improve and hover between 1.0 times and 2.0 times in the next two fiscals due to significant cash flow generation which would lead to a reduction in its consolidated gross debt.

Debt reduction

The company reduced its consolidated gross debt by ₹21,300 crore in the previous fiscal, and further by about ₹11,000 crore in the first half of this fiscal. The company has set a target net leverage ratio of about 2.5 times on a sustained basis at a consolidated level.

The management has indicated that the 5 million tonnes (mt) brownfield expansion at Kalinganagar will be completed by FY24 and the balance ₹17,000 crore of the initial outlay of ₹24,000 crore will be spent over till FY24.

Also read: Steel producers may offer volume discounts to MSMEs, exporters

Domestic steel producers are substantially dependant on imports of coking coal, and hence, any supply-side issue could have a material impact on utilisations and profitability. In addition, the metal prices are heavily dependent on international prices, as the domestic market is open for imports. Anti-dumping duty from China is temporarily suspended.

According to the management, it is primarily the UK operations of 3 mt capacity (of the total 10 mt capacity under TSE) that has been a drag on cash flows due to weaker spreads. TSL has proposed to separate the UK operations from TSE as part of restructuring the European operations.

Steel sector India is characterised by demand cyclicity, volatility in raw material and metal prices, high regulatory risk and the risk of imports. The sector participants typically have high operating and financial leverage, large working capital requirements, and large-sized debt capital funding of the capex.

Sustained weak profitability of the European operations, substantial debt-led acquisitions and higher-than-expected capex outflows leading to the consolidated adjusted net leverage exceeding 3 times on a sustained basis, would result in negative rating action.

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