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*

 

 

 

INR252.93

IND AA/Stable/IND A1+

Affirmed

Non-convertible debentures (NCDs)*

 

 

 

INR71.51

IND AA/Stable

Affirmed

Working capital facilities

-

-

USD0.10

IND AA/Stable/IND A1+

Affirmed

Commercial paper

-

Up to180 days

INR150

IND A1+

Affirmed

Proposed long-term debt (term loan)#

 

 

 

INR5

Provisional IND AA/Stable

 

 Affirmed

Proposed non-fund-based limit#

 

 

 

 

INR11.65

Provisional IND AA/Stable/Provisional IND A1+

 Affirmed

Proposed fund-based limits#

 

 

 

 

INR6

Provisional IND AA/Stable/Provisional IND A1+

 Affirmed

*Details in Annexure

# The ratings are provisional and shall be confirmed upon the sanction and execution of loan/transaction documents for the above instruments to the satisfaction of Ind-Ra.

Analytical Approach:
Ind-Ra continues to take a consolidated view of TSL and its 237 subsidiaries to arrive at the ratings. 

KEY RATING DRIVERS

Domestic Focus Strategy: TSL’s already strong domestic sales mix improved in FY19 post Bhushan Steel Limited’s (BSL) acquisition in May 2018 and the consequent formation of Tata Steel BSL Limited (TSBSL), a 72.65% subsidiary of TSL. The domestic focus is likely to improve further by FYE20 with the consolidation of Usha Martin Limited’s (UML; ‘IND BBB+’/Stable) steel division in April 2019 and the proposed sale of TSL’s South-East Asian operations. TSL’s domestic operations are well-integrated with captive power and mining operations, which meet 100% of its iron ore requirements and about 29% of its metallurgical coal requirements (excluding TSBSL and UML). Therefore, TSL (India operations) is among the most low-cost steel producers in the world. The integration of BSL and the steady share of branded/value-added products (FY19: 42.5%) enables TSL to post strong cash flows in India. TSL has taken substantial business restructuring measures since FY15 that have reduced its exposure to European operations with capacity declining to 12.1mt from 17.9mt with the sale of loss-making assets and the restructuring of British Steel Pension Scheme. TSL continues to look out for improving the operating profitability in Europe and at the same time evaluate options to reduce exposure to European assets.

Liquidity Indicator - Adequate: The agency expects TSL’s adequate liquidity to remain stable with robust operating cash flow generation. The agency budgets annual capex of INR90 billion in FY20 and INR80 billion in FY21. TSL’s scheduled annual repayments are INR40.82 billion in 4QFY20 and INR17.83 billion in FY21. The agency assumes the incremental working capital requirements in FY20 to be limited that will be broadly offset by any increase in the receivable period. TSL had unused working capital line and unused capital expenditure limit of about INR70 billion combined at end-September 2019. The free cash flow generation is likely to be minimal given a substantial capex outlay. TSL may need refinancing for some of debt repayments due in the remainder of FY20.

Financial Leverage to Inch Up Further: Ind-Ra expects TSL’s consolidated adjusted net leverage (adjusted debt net of cash/EBITDAR) to remain elevated over FY20-FY21, on the back of the likely fall in demand growth and per tonne margins that follows the completion of substantial debt-funded acquisitions in FY19. The adjusted net leverage is likely to increase substantially in FY20 (FY19: 3.3x; 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 from end-FY21 to FY22 as the company would accord priority to the CRM and pellet plant. The agency has not assumed any major inorganic growth-related capital outflows in its base case.

European Operations Challenged: TSL’s European operations, especially those in the UK, face stiff competition from imports, are not backward integrated and have high operational overheads leading to high volatility in margins. In 9MFY20, European operations reported a substantial decline in margins owing to a fall in metal prices, the shut-down of the UK operations for a few days, and the one-off expenses reported on carbon credits. In FY19, European operations generated a blended EBITDA/tonne of about INR5,600, which turned negative in 3QFY20. The agency assumes the EBITDA/tonne would remain weak in the near term owing to the decline in global demand as well as prices. In FY19, the European operations had 9.6mt production with about 3mt coming from the UK assets, which did not generate positive cash flows from operations.

Weak Domestic Demand Outlook: The agency expects the domestic demand growth to decline substantially in the near term due to lower demand from construction and real estate segments on lower government spending and the low availability of credit. This will lead to reduce per tonne margins and capacity utilisations in 4QFY20 and 1QFY21. Declining metal prices entailed inventory losses in 9MFY20; the prices picked up during November 2019-January 2020. The agency notes that the correction in metal prices was sharper than that in  raw material prices until the end of 9MFY20. The sharp fall in coking coal prices is likely to offer a major relief to gross margins in 2HFY20 while the conversion costs will remain high due to lag effect. TSL has a high proportion of sales volumes dedicated to the auto sector that is currently experiencing a major slowdown. However, Ind-Ra expects the overall demand to recover in 2HFY21 due to improved government and consumer spending.

The agency estimates TSL’s standalone EBITDA/tonne to range between INR13,000 and INR13,500 for India operations in FY20 (FY19: INR16,360). Ind-Ra has assumed the EBITDA/tonne of TSBSL, that holds the acquired operations of BSL, to be about INR9,000 in FY20 (FY19: INR9,360; FY18: INR6,036), with savings from an increase in captive iron ore supplies, offsetting the negative impact of the fall in demand and metal prices.


RATING SENSITIVITIES

Positive: Consolidated 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 consolidated 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 FYE19, TSL had a global crude steel production capacity of 33mtpa across Jamshedpur (9.7mtpa), Kalinganagar phase I (3mt), South East Asia (2.2mtpa; discontinued) and Europe (12.4mtpa).

FINANCIAL SUMMARY

INR billion

March 2019

March 2018

Revenue

             1,576.68

              1,323.14

Operating EBITDA

                296.08

                 218.15

Operating EBITDA margin (%)

19

16

Closing net debt

              1,032.47

                 760.67

Op. EBITDA/Net interest expense (x)

                             3.9

                               3.9

Net debt/Op. EBITDA (x)

                             3.4

                               3.4

Source: TSL, Ind-Ra


RATING HISTORY

Instrument Type

Current Rating/Outlook

Historical Rating /Rating Watch

Rating Type

Rated Limits (billion)

Rating

1 November 2019

28 March 2019

 

7 November 2017

Issuer rating

Long-term

-

IND AA/Stable

IND AA/Stable

IND AA/Stable

 

IND AA/RWE

Commercial paper

Short-term

INR150

IND A1+

IND A1+

 

IND A1+

 

IND A1+

NCDs

Long-term

INR71.51

IND AA/Stable

IND AA/Stable

 

IND AA/Stable

 

IND AA/RWE

Bank facilities

Long-term/Short-term

INR275.58

IND AA/Stable/IND A1+

IND AA/Stable/IND A1+

 

IND AA/Stable/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/Stable/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

-

-

-

-

INR19.5

IND AA/Stable/IND A1+

Long-term debt (term loan)

-

-

-

April 2027

INR92.5

IND AA/Stable

Non-fund-based limits

-

-

-

-

INR140.93

IND AA/Stable/IND A1+

NCD

INE081A08223

March 2019

9.8359

March 2034

INR43.15

IND AA/Stable

NCD*

-

 

 

 

INR6.8

IND AA/Stable

NCD*

-

 

 

 

INR21.56 (reduced from INR28.36)

IND AA/Stable

* Yet to be issued


COMPLEXITY LEVEL OF INSTRUMENTS

For details on the complexity levels 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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For more information, visit www.indiaratings.co.in.

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Applicable Criteria

Analyst Names

  • Primary Analyst

    Mahaveer Jain

    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

    Archana Tiwari

    Sr. Manager – Corporate Communications & Investor Relations
    +91 22 40001729