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S&P Ratings has revised the outlook of Tata Steel from ‘stable’ to ‘positive’ and reaffirmed its BBB-minus rating on the back of strong free operating cash flows over the next two years owing to firm steel prices.
The resilience of the company’s credit metrics to steel price cycles has also strengthened following a significant reduction in debt over the past 18 months, it said.
The global rating agency expects the company to generate $3-4 billion of free operating cash annually over the next two years, based on EBITDA per tonne of the Indian operations averaging about ₹20,000 over the next two years. This is about 40 per cent higher than typical levels in the past.
The cash flow should result in further debt reduction, in absence of increased investments or shareholder returns. Tata Steel intends to increase its capacity in India to 40 million tonne by 2030, from about 25 mt at the end of fiscal 2024.
Even after incurring additional capex on capacity expansion, it said the company’s credit metrics will strengthen, though the pace of deleveraging may be slower than in the past 18 months.
The company’s adjusted debt as of March-end was down 45 per cent from about ₹1.1 lakh crore a year earlier.
Even if Tata Steel’s debt remains at the March-level and steel prices reduce to more normal levels, the funds from operations-to-debt ratio should be 35-40 per cent, after the completion of the 5 mt expansion at Kalinganagar in late FY24.
At the normal level of steel prices, S&P Ratings estimate the EBITDA per tonne to be about ₹14,000 a tonne against ₹19,000-23,000 a tonne.
Outlook revision
“We may revise the rating outlook to stable if Tata Steel pursues an aggressive expansion plan that prevents further debt reduction, particularly if it is combined with a sharp decline in operating cash flows,” it said.
S&P Ratings expects Tata Steel to register sales of about 19 mt in India and 9.5 mt in Europe in FY’23 and FY24, similar to ‘that of last fiscal.
Average net sales realisation will be up 10 per cent this fiscal compared to FY22 largely due to higher prices in Europe. However, in FY24, steel prices are expected to decline 8 per cent. Estimated capex of ₹12,000 crore each in next two fiscals may not affect cash flows if steel prices stay strong, it said.
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