By Mahaveer Jain

 India Ratings and Research (Ind-Ra) has affirmed Tata Steel Limited’s (TSL) Long-Term Issuer Rating at ‘IND AA’. The Outlook is Stable. The instrument-wise rating actions are as follows:

Instrument Type

Date of Issuance

Coupon Rate

Maturity Date

Size of Issue (billion)

Rating/Outlook

Rating Action

Bank facilities*

-

-

-

INR186.58

IND AA/Stable/IND A1+

Affirmed

Working capital facilities

-

 

-

USD0.10

IND AA/Stable/IND A1+

Affirmed

Non-convertible debentures (NCDs)*

 

 

 

INR50.00

IND AA/Stable

Assigned

NCDs

-

-

-

INR21.51

IND AA/Stable

Affirmed

Commercial paper

-

6%-6.8%

Up to180 days

INR150

IND A1+

Affirmed

*Yet to be issued

 

Analytical Approach: Ind-Ra continues to take a consolidated view of TSL and its 244 subsidiaries to arrive at the rating. 

 

The affirmation reflects Ind-Ra’s expectation of an improvement in TSL’s business profile because of the steps taken for the carve-out of European operations and the integration of Bhushan Steel Limited (BSL), which would result in a stronger per tonne EBITDA. However, the net leverage level would remain elevated in the range of 3.5x-4.0x during FY19-FY21 due to the ongoing capital expenditure programme.

KEY RATING DRIVERS

Enhanced Business Profile: TSL’s current 55:45 capacity mix of domestic and foreign operations will change substantially to fully domestic following the stake sale in the South-East Asian operations and the carve-out of the European operations in FY20. Its domestic operations are well-integrated with captive mining operations, which meet 100% of its iron ore requirements and about a fourth of its metallurgical coal requirements. Consequently, TSL is also among India’s low-cost steel producers. The agency believes the acquisition of BSL will enable TSL to further expand its footprint in Eastern India; strengthen customer segments across automotive, appliance, tubes, general engineering and fabrication; and maintain a steady proportion of downstream products. Ind-Ra believes TSL will ramp up its iron ore mine output to cater to the expanded capacity over next two-to-three years.

 

Strong Profitability: TSL’s EBITDA/tonne improved to INR10,600 in 9MFY19 (FY18: INR8,700) owing to an increase in international prices, strong domestic demand and protection from cheap imports. Ind-Ra expects the consolidated profitability to increase further in the near-to-medium term owing to the focus on domestic operations, strong domestic demand, the integration of BSL and the steady share of branded/value-added products (FY18: 46%). The agency estimates TSL’s standalone capacity utilisation to remain near full over FY19-FY20 (FY18: 98%) and the EBITDA/tonne to range between INR12,000-14,000 for India operations. Ind-Ra has assumed the EBITDA/tonne at BSL to be about INR9,500 in FY20 (FY18: INR6,036), underpinned by an increase in capacity utilisation and captive iron ore supplies.

 

Adequate Liquidity: As of December 2018, TSL had about INR193.2 billion in cash and equivalents, current investments and undrawn credit lines. The company’s liquidity is likely to be adequate in FY19, with meagre debt repayments, and will improve with the transfer of European operations’ debt to the JV in FY20. Also, TSL has access to domestic and international capital markets due to its established reputation. TSL’s EBITDA gross interest coverage (EBITDA/gross interest costs) is likely to remain comfortable in the band of 3.0x to 4.0x in FY19 (FY18: 4.0x, FY17: 2.6x). The average cost of debt is likely to increase due to the carve-out of lower-cost EU debt.

 

Leverage to Remain Elevated: Ind-Ra expects TSL’s net leverage (adjusted debt net of cash/EBITDAR) to remain elevated during FY19-FY21, on the back of partly debt-funded acquisition of BSL and the steel division Usha Martin Limited (UML; ‘IND BB+’/RWP), and annual investment of INR100 billion-90 billion in capacity expansion and maintenance, adjusting for the carving out of the European steel operations. The adjusted net leverage is likely to increase to about 3.6x in FY19 (FY18: 3.3x, FY17: 5.6x). TSL’s INR235 billion capital expenditure programme to expand capacity at its Kalinganagar facility by 5mtpa to 8mtpa over FY19-FY23 will start seeing material cash outflows starting FY20. The agency has not assumed any major inorganic growth-related capital outflows in its base case.

 

The carve-out of the European operations will pare EUR2.5 billion-EUR2.7 billion of debt from TSL’s consolidated financials, as the JV debt would have no recourse to TSL and the JV will be accounted under the equity method. The agency expects the acquisition-related debt to be serviced partly from dividends from the JV. Given that the European operations involved higher volatility in profitability and financial leverage compared to domestic operations, the carve-out is likely to reduce the company’s balance sheet risk.


RATING SENSITIVITIES

Positive: Adjusted net leverage reducing below 3.0x on a sustained basis would lead to a positive rating action. 

Negative:
Any substantial debt-led acquisitions or higher-than-expected capex outflows leading to an increase in the adjusted net leverage above 4.0x on a sustained basis would lead to a negative rating action.


COMPANY PROFILE

TSL commenced operations in 1907, with the establishment of India’s first integrated steel plant. At FYE18, TSL had a global crude steel production capacity of 27.3mtpa across Jamshedpur (9.7mtpa), South East Asia (2.2mtpa) and Europe (12.4mtpa post divestment of the UK long products business). The company added a new capacity in Kalinganagar, phase I (3.0mtpa) of which was commissioned in May 2016.   

 

FINANCIAL SUMMARY

 

Particulars

FY18

FY17

Revenue (INR million)

1,323,149

1,154,232

Operating EBITDA (INR million)

218,153

131,399

Operating EBITDA margin (%)

16.5

11.4

Closing net debt (INR million)

754,306

779,183

Operating EBITDAR/net interest expense (x)

3.7

2.5

Adjusted net debt/operating EBITDAR (x)

3.3

5.6

Source: TSL, Ind-Ra

 



RATING HISTORY

Instrument Type

Current Rating/Outlook

Historical Rating /Rating Watch

Rating Type

Rated Limits (billion)

Rating

21 September 2018

 

7 November 2017

10 October 2016

Issuer rating

Long-term

-

IND AA/Stable

IND AA/Stable

 

IND AA/RWE

IND AA/RWE

Commercial paper

Short-term

INR150

IND A1+

IND A1+

 

IND A1+

IND A1+

NCDs

Long-term

INR71.511

IND AA/Stable

IND AA/Stable

 

IND AA/RWE

IND AA/RWE

Bank facilities

Long-term/Short-term

INR186.58

IND AA/Stable/IND A1+

IND AA/Stable/IND A1+

 

IND AA/RWE/IND A1+/

IND AA/RWE/IND A1+/

Working capital facilities

Long-term/Short-term

USD0.10

IND AA/Stable/IND A1+

IND AA/Stable/IND A1+

 

IND AA/RWE/IND A1+/

IND AA/RWE/IND A1+/

ANNEXURE

Instrument

ISIN

Date of Issuance

Coupon Rate (%)

Maturity Date

Size of Issue (billion)

Rating/Outlook

Fund-based cash credit limits

-

-

-

-

INR20.255

IND AA/Stable

Fund-based cash credit limits

 

 

 

 

INR0.25

IND AA/Stable/IND A1+

Long-term debt (term loan)

-

-

-

April 2019-April 2027

INR72.5

IND AA/Stable

Non-fund-based limits

-

-

-

-

INR93.58

IND AA/Stable/IND A1+

Commercial Paper Program

 

NA

6%-6.8%

180 days

INR150

IND A1+

NCDs

INE081A08132

May 2009

10-11

May 2019

INR15

IND AA/Stable

NCDs

INE081A08124

May 2009

10-11

May 2019

INR6.51

IND AA/Stable

NCDs*

 

 

 

 

INR50

IND AA/Stable

* Yet to be issued


COMPLEXITY LEVEL OF INSTRUMENTS

For details on the complexity level of the instruments, please visit https://www.indiaratings.co.in/complexity-indicators

SOLICITATION DISCLOSURES

Additional information is available at www.indiaratings.co.in. The ratings above were solicited by, or on behalf of, the issuer, and therefore, India Ratings has been compensated for the provision of the ratings. 

Ratings are not a recommendation or suggestion, directly or indirectly, to you or any other person, to buy, sell, make or hold any investment, loan or security or to undertake any investment strategy with respect to any investment, loan or security or any issuer.

ABOUT INDIA RATINGS AND RESEARCH

About India Ratings and Research: India Ratings and Research (Ind-Ra) is India's most respected credit rating agency committed to providing India's credit markets accurate, timely and prospective credit opinions. Built on a foundation of independent thinking, rigorous analytics, and an open and balanced approach towards credit research, Ind-Ra has grown rapidly during the past decade, gaining significant market presence in India's fixed income market. 

Ind-Ra currently maintains coverage of corporate issuers, financial institutions (including banks and insurance companies), finance and leasing companies, managed funds, urban local bodies and project finance companies. 

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Applicable Criteria

Analyst Names

  • Primary Analyst

    Mahaveer Jain

    Associate Director
    India Ratings and Research Pvt Ltd Wockhardt Towers, 4th Floor, West Wing, Bandra Kurla Complex, Bandra East,Mumbai - 400051
    +91 80 46666817

    Media Relation

    Namita Sharma

    Manager – Corporate Communication
    +91 22 40356121