By Mahaveer Jain

India Ratings and Research (Ind-Ra) has revised Tata Steel Limited’s (TSL) Outlook to Negative from Stable while affirming the Long-Term Issuer Rating at ‘IND AA’. 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/Negative/IND A1+

Affirmed; Outlook revised to Negative from Stable

Non-convertible debentures (NCDs)*

 

 

 

INR71.51

IND AA/Negative

Affirmed; Outlook revised to Negative from Stable

Non-convertible debentures (NCDs)#

 

 

 

INR80.0

IND AA/Negative

Assigned

Working capital facilities

-

-

USD0.10

IND AA/Negative/IND A1+

Affirmed; Outlook revised to Negative from Stable

Commercial paper

-

Up to180 days

INR150

IND A1+

Affirmed

Proposed long-term debt (term loan)#

 

 

 

INR5

Provisional IND AA/Negative

 

Affirmed; Outlook revised to Negative from Stable

Proposed non-fund-based limit#

 

 

 

 

INR11.65

Provisional IND AA/Negative/Provisional IND A1+

Affirmed; Outlook revised to Negative from Stable

Proposed fund-based limits#

 

 

 

 

INR6

Provisional IND AA/Negative/Provisional IND A1+

Affirmed; Outlook revised to Negative from Stable

*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

Negative Outlook: The Outlook revision reflects the risk of a substantial deterioration in the company's credit profile caused by the COVID-19 containment measures, and the overall impact of the lockdown on key end-user segments, including construction/infrastructure and automobiles. Ind-Ra believes a prolonged lockdown of the businesses will lead to considerable curtailment of demand for an extended period, thereby impacting the company’s credit metrics beyond FY21. However, TSL has a proven history of taking decisive action to manage crises, and the liquidity buffer will enable it to face the most challenging quarters of this year. As such, the agency considers TSL to be well-equipped to cope with the impact of the COVID-19 pandemic, with free cash of close to INR75 billion and committed credit lines against a short-term debt of INR80 billion at end-March 2020.

Weak Domestic Demand Outlook: With the COVID-19-related disruptions likely to cause a fall in demand across end-users segments, the agency expects domestic demand growth to decline substantially in the near term.  Auto, construction, engineering and real estate segments have been severely affected by the lockdown, and may only recover gradually in 2HFY21 once government spending picks up and household incomes improve.

Profitability Impacted: The agency expects TSL’s near-term profitability to be impacted by both fall in metal prices and fall in capacity utilisations. Along with inventory losses due to the falling metal prices, higher competitive intensity to exhaust the inventory build-up could exert pressure on gross margins. Given the high operating leverage, lower volumes would translate into higher conversion costs on the back of higher fixed costs per unit. The agency notes that the correction in metal prices could be sharper than that in raw material prices, as coking coal is imported, and the supply is quite concentrated with a few countries. However, the fall in iron ore prices is likely to support gross margins.

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 FY21 (end-FY20E: 6.0x, FY19: 3.3x). TSL had moderated its capital expenditure program in FY20, and the agency expects the issuer to defer discretionary capital expenditure outflows in FY21 to conserve liquidity.

Liquidity Indicator - Adequate: The agency expects TSL’s liquidity to be sufficient to fund fixed costs during the ongoing lockdown . TSL’s scheduled annual repayments are meagre at INR17.83 billion in FY21, and as such, the company  need not resort to material refinancing of debt maturities. The agency expects the incremental working capital requirements to inch up with the rise in inventory levels and increased receivables period, though the impact of the same would be partly offset by a fall in commodity prices. TSL had an unused working capital line and unused capital expenditure limit, amounting to a total of about INR80 billion at end-March 2020. The agency expects TSL to maintain a liquidity buffer against a prolonged demand weakness, though the refinancing needs are limited.

Domestic Focus Strategy: TSL’s already strong domestic sales mix improved in FY20 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 has also improved 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, as per the management. The integration of BSL and the steady share of branded/value-added products (FY19: 42.5%) has enabled 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 measures to improve the operating profitability in Europe, and at the same time, has been evaluating options to reduce its exposure to European assets.

As such, TSL’s standalone profile is stronger than the consolidated profile. For the trailing twelve months at end-3QFY20 the company’s standalone revenue was INR699 billion, the EBITDA amounted to INR169.6 billion and interest coverage (operating EBITDA/net interest expense) was 5.9x, compared to the consolidated revenue of INR 1,484 billion, EBITDA of INR205.7 billion and interest coverage of 2.73x. The standalone revenue accounted for 47% of the consolidated revenue, while the standalone EBITDA constituted  82% of the consolidated EBITDA.

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 FY20, 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.


RATING SENSITIVITIES

Positive: Ind-Ra expects to revise the Outlook back to Stable upon visibility of demand recovery, ramp-up of capacity utilisations and substantial improvement in profitability, leading to an improvement in the credit metrics, with the adjusted net leverage falling below 4.0x, on a sustained basis.

Negative: Continued sub-optimal capacity utilisation and weak profitability, resulting in the adjusted net leverage remaining above 4.0x on a sustained basis could lead to a negative rating action. Also, the inability to maintain sufficient liquidity buffer to hedge against a prolonged demand slowdown would be viewed negatively.


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 - CONSOLIDATED

Particulars (INR billion)

FY19

FY18

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

Operating EBITDA/net interest expense (x)

                             3.9

                               3.9

Net debt/ operating  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

6 March 2020

28 March 2019

7 November 2017

Issuer rating

Long-term

-

IND AA/Negative

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

INR151.51

IND AA/Negative

IND AA/Stable

 

IND AA/Stable

 

IND AA/RWE

Bank facilities

Long-term/Short-term

INR275.58

IND AA/Negative/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/Negative/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/Negative/IND A1+

Long-term debt (term loan)

-

-

-

April 2027

92.5

IND AA/Negative

Non-fund-based limits

-

-

-

-

140.93

IND AA/Negative/IND A1+

NCD

INE081A08223

March 2019

9.8359

March 2034

INR43.15

IND AA/Negative

NCD*

 

 

 

 

INR108.36

IND AA/Negative

* 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. 

Headquartered in Mumbai, Ind-Ra has seven branch offices located in Ahmedabad, Bengaluru, Chennai, Delhi, Hyderabad, Kolkata and Pune. Ind-Ra is recognised by the Securities and Exchange Board of India, the Reserve Bank of India and National Housing Bank. 

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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

    Ankur Dahiya

    Manager – Corporate Communication
    +91 22 40356121