By Siddharth Rego

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

Instrument Type

Date of Issuance

Coupon Rate (%)

Maturity Date

Size of Issue (billion)

Rating/Outlook

Rating Action

Term loan

-

-

31 March 2031

INR29

IND AA/Stable

Affirmed

Proposed long-term loan*

-

-

-

INR1

Provisional IND AA/Stable

Affirmed

Proposed working capital limits*#

-

-

-

INR12.02

Provisional IND AA/Stable/Provisional IND A1+

Affirmed

Fund-based limits$^

 

 

 

INR4.7

IND AA/Stable

Assigned

Non-fund-based limits^

 

 

 

INR3.28

IND A1+

Assigned

Commercial paper (CP)

-

-

30-180 days

INR7 (reduced from INR40)

IND A1+

Affirmed

 

* The ratings are provisional and shall be confirmed upon the execution of the loan documents for the above facility by TSLPL to the satisfaction of Ind-Ra

# Interchangeable between fund-based and non-fund-based limits

$ Fully interchangeable with non-fund based limits

^ The assignment of the final ratings follows the receipt of the final documents conforming to the information already received by Ind-Ra.

 

Analytical Approach: Ind-Ra has factored in strong strategic and operational linkages between TSLPL and its parent, Tata Steel Limited (TSL; ‘IND AA’/Stable), while arriving at the ratings.

KEY RATING DRIVERS

Strong Strategic and Operational Linkages: The agency believes TSLPL is of strategic importance to TSL, as is a part of the latter’s strategy to expand its presence in the long product business. Post the acquisition of Usha Martin Limited’s (UML) steel division, the company’s name was changed to TSLPL (to include ‘Tata Steel’) from Tata Sponge Iron Limited. TSL’s shareholding increased to 75.91% in TSLPL (54.5% prior to the rights issue), with its participation in the rights issue in July 2019. The company raised INR14.85 billion through the rights issue to fund (UML’s steel division acquisition in April 2019.

Up to 1HFY20, TSLPL had procured a substantial portion of its iron ore requirement from TSL. Upon completion of the transfer or UML’s iron ore mines, TSLPL shall continue to rely on TSL for its incremental iron ore requirement over and above its captive consumption. Surplus power, if any, shall be sold to TSL. Furthermore, both the managing director and chief financial officer of TSL are on the board of TSLPL, with the senior management on the board being members who have served in senior positions within the TSL group. Also, the acquired UML assets are in close proximity to TSL’s Jamshedpur facility and are likely to bring in the necessary operational efficiencies.

Improved Business Profile: With the UML acquisition, the company has entered the alloy steel long products business, enabling it to diversify its product profile. Prior to the acquisition, TSLPL relied on its sponge iron semi products division for revenue. The acquired iron ore and coal mines would enable the company to increase the captive raw material supplies and per tonne margins in FY21.

Liquidity Indicator - Adequate: The agency expects TSLPL’s liquidity to remain adequate in FY20 with unused fund-based working capital lines of INR4.7 billion at end-September 2019. The company utilised 76% of its non-fund-based limits in October 2019. Additionally, the term debt repayments are scheduled to begin in FY21. The company is likely to record negative cash flow from operations in FY20 due to lower EBITDA but generate positive cash flows from FY21 (FY19: INR1.45 billion). While Ind-Ra expects the company’s debt service coverage ratio to be below 1x in FY20, it has sufficient cash & cash equivalents (1HFYE20: INR1.6 billion) and unutilised sanctioned limits to meet its debt servicing requirements. Further, the company has a board approved sanction for issuance of non-convertible preference shares of INR10 billion to TSL in case of any further funding requirements.

Leverage to Increase in FY20: Given the weak sector fundamentals and the UML acquisition moving in tandem, Ind-Ra believes TSLPL’s net leverage (adjusted debt net of cash/EBITDAR) to be higher-than-expected at above 10.0x in FY20, although improve gradually with the ramping up of the acquired UML division. The company has entirely refinanced the funding of UML acquisition with a mix of long-term bank loans, which have limited repayments in the initial years with ballooning repayments in addition to the rights shares. The company had a net cash position in FY19. The agency expects interest coverage (operating EBITDA/gross interest expense) to fall to 0.6x in FY20 (FY19: 48x, FY18: 56x) due to a likely lower EBITDA of INR1.59 billion.

Profitability of Combined Entity Expected to be Lower in FY20: Ind-Ra expects the combined EBITDA per tonne of TSLPL’s sponge iron and the acquired UML steel businesses to be lower at around INR3,000 in FY20, although gradually improve to INR5,600-5,800 from FY21. The agency estimates the overall annual EBITDA at INR1.5 billion-1.6 billion, due to slower-than-expected ramping up of UML operations in addition to compressed margins due to the weak sector fundamentals.
 


RATING SENSITIVITIES

Negative: The ratings will move in tandem with TSL’s rating. Deterioration in TSL’s or TSLPL’s credit profile or any weakening of the linkages between the two entities could lead to a negative rating action.


COMPANY PROFILE

TSLPL manufactures alloy steel, high-grade sponge iron and sells surplus power.

FINANCIAL SUMMARY

Particulars

FY19

FY18

Revenue (INR billion)

9.92

8.00

EBITDA (INR billion)

1.45

1.83

EBITDA margin (%)

14.6

22.8

Gross EBITDAR interest coverage (x)

47.8

56.3

Net debt (INR billion)

-4.7

- 5.4

Source: TSLPL, Ind-Ra


RATING HISTORY

Instrument Type

Current Rating/Outlook

Historical Rating

Rating Type

Rated Limits (billion)

Rating

25 July 2019

21 December 2018

Issuer rating

Long-term

-

IND AA/Stable

IND AA/Stable

-

Term loan

Long-term

INR30

IND AA/Stable

IND AA/Stable

-

Proposed working capital limits

Long-term/Short-term

INR12.02

Provisional IND AA/Stable/Provisional IND A1+

Provisional IND AA/Stable/ Provisional IND A1+

-

Fund-based limits

Long-term

INR4.7

IND AA/Stable

-

-

Non-fund-based limits

Short-term

INR3.28

IND A1+

-

-

CP

Short-term

INR7

IND A1+

IND A1+

IND A1+


COMPLEXITY LEVEL OF INSTRUMENTS

For details on the complexity level of the instrument, 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. 

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Analyst Names

  • Primary Analyst

    Siddharth Rego

    Analyst
    India Ratings and Research Pvt Ltd Wockhardt Towers, 4th Floor, West Wing, Bandra Kurla Complex, Bandra East,Mumbai - 400051
    +91 22 40356115

    Media Relation

    Namita Sharma

    Manager – Corporate Communication
    +91 22 40356121