Tata Steel earnings to improve on India ramp-up

The Dollar Business Bureau

Moody's Investors Service on Friday said Greenfield expansion of Tata Steel in India and its expected restructuring of UK operations will drive Tata Steel and Tata Steel UK Holdings Limited's (TSUKH) earnings in the financial year 2017.

However, the credit rating agency kept rating of Tata Steel Ltd. (Ba3 negative) and Tata Steel UK Holdings Ltd. (B3 negative) unchanged. In February this year, it had downgraded credit ratings of the Indian steel major by two notches to Ba3 from Ba1, in the backdrop of a weaker than expected performance in key operating markets of Europe, India and South-East Asia.

“Ratings on Tata Steel Ltd. (Tata Steel, Ba3 negative) and Tata Steel UK Holdings Limited (TSUKH, B3 negative) remain unchanged at this point in time, despite their weak operating results for the full year ending March 2016,” Moody’s said in a statement.

Tata Steel announced consolidated revenue of Rs.1,172 billion and consolidated underlying EBITDA (earnings before interest, taxes, depreciation and amortisation) of $79 billion, as it fell 16% and 39% respectively from last year.

“The results for the quarter ended March 2016 showed a substantial improvement over the previous trailing quarter with consolidated revenue and EBITDA of Rs.295 billion and Rs.23 billion, an increase of 5% and 171% respectively,” it said.

The improvement in the operating output came as a result of the general uptick in steel prices across the globe in February and March, after its prices nosedived in January.

"We estimate consolidated adjusted leverage of 8.7x at March 2016, slightly below the peak of 9.0x at December 2015. Looking ahead into FY2017 we expect leverage to correct towards 6.5x-7.5x," said Kaustubh Chaubal, Moody's Vice President and Senior Analyst.

"The divestment of the loss making operations will reduce the drag on the European business' profitability which has been under strain for a while; although much is unknown about the divestment contours including debt and pension liabilities to be transferred, which in particular will drive the impact, if any, on the ratings and outlook on Tata Steel and TSUKH," said Chaubal.

Earlier, Tata Steel had reported gross debt of Rs.862 billion at March 2016, rose by only Rs.55 billion from March 2015 debt levels. The marginal increase came despite capital expenditure of Rs.115 billion and weak operations throughout the year.

The company’s India business revenues and underlying EBITDA of Rs.382 billion and Rs.74 billion fell 9% and 27% from last year.

Its European operations reported revenue of Rs.674 billion and underlying EBITDA loss of Rs.6 billion, thereby falling 16% and 115% respectively for FY 2016.

In India, as Moody’s said, it would consider the extension of safeguard duty for a period of three years until 2019, from its initial 200 day period.

For a change in outlook on Tata Steel to stable, as the global rating agency said, it would need to see improvements in its operating and credit metrics and if the domestic steel prices continue to recover based on an increase in domestic steel volumes.