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Credit research firm CreditSights has downgraded Tata Steel to ‘Underperform’ from ‘Market perform’ as it believes Tata 2028 spreads are too tight considering persisting weakness at Tata Steel Europe and a lacklustre steel price environment that could pressurise its credit metrics in FY24.
Tata Steel’s results in the first half of this fiscal were poorer than expected. Its revenues and EBITDA fell 7 per cent and 51 per cent y-o-y respectively on the back of weak Europe earnings, higher inventory losses, and higher operating expenses that negated lower raw material costs.
Liquidity tightened further (unrestricted cash of ₹8,800 crore stood below short-term debt of ₹38,100 crore), though CreditSights is not materially concerned given Tata’s strong banking relationships and access to capital markets that should facilitate debt rollover or refinancing.
Gross and net leverage worsened materially to 4.7 times and 4.3 times respectively.
The free cash burn narrowed to negative ₹5,800 crore (negative ₹13,900 crore in H1 FY23) amid ongoing capacity ramp ups across multiple locations.
Capex plans
Management has guided towards ₹16,000 crore of capex in this fiscal to prioritise the completion of the 5 mtpa Kalinganagar expansion by FY24-end. The credit research firm expects the second half capex to trend in line with F1H24 levels of ₹8,600 crore.
“We expect Tata Steel’s leverage metrics to worsen further in second half compared to first half of this fiscal,” it said.
CreditSights believes Tata’s credit metrics could remain strained amid a lacklustre steel price environment and ongoing weakness at the Europe business. While it is positive on the recent £500-million support package by the UK Government to Tata Steel UK that may help lower the unit’s green capex needs and narrow its EBITDA losses, the positive changes may only take effect after several quarters.
Potential one-off restructuring and layoff costs at the UK unit may induce further margin pressure. Moreover, the company’s ambitious plans to ramp up its installed capacity from 34 mtpa to 55 mtpa by 2030 could weigh on its credit profile if funded mainly by debt.
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