By Siddharth Rego

India Ratings and Research (Ind-Ra) has revised Tata Steel Long Products Limited’s (TSLPL) Outlook to Negative from Stable while affirming its 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

Term loan

-

-

31 March 2031

INR29

IND AA/Negative

Affirmed; Outlook Revised to Negative from Stable

Proposed long-term loan*

-

-

-

INR1

Provisional IND AA/Negative

Affirmed; Outlook Revised to Negative from Stable

Proposed working capital limits*#

-

-

-

INR12.02

Provisional IND AA/Negative/Provisional IND A1+

Affirmed; Outlook Revised to Negative from Stable

Fund-based limits$

 

 

 

INR4.7

IND AA/Negative

Affirmed; Outlook Revised to Negative from Stable

Non-fund-based limits

 

 

 

INR3.28

IND A1+

Affirmed

Commercial paper (CP)

-

-

30-180 days

INR7

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

 

Analytical Approach: Ind-Ra continues to use the top-down approach according to the Parent Subsidiary Linkage criteria, given  the strong strategic and operational linkages between TSLPL and its parent Tata Steel Limited (TSL; 'IND AA'/Negative).
 

KEY RATING DRIVERS

Negative Outlook: The Outlook revision reflects a similar rating action on TSL because of the deterioration in the credit profile of TSLPL and TSL, due to the COVID-19-related containment measures and its overall impact on key end-user segments, including construction/infrastructure and automobiles. The agency believes a prolonged lockdown of the businesses will lead to substantial curtailment in demand for a protracted period impacting credit metrics beyond FY21.

 

Weak Domestic Demand Outlook: The Outlook also reflect the agency’s expectation of a sharp decline in the domestic demand in the near term due to COVID-19 related disruptions, and the consequent fall in demand across end-use segments. The auto, construction, engineering and real estate segments have been impacted substantially and will only recover gradually once the government spending picks up. This will lead to a fall in TSLPL’s per tonne margins and capacity utilisations in FY21. The correction in metal prices could be sharper than that in raw material prices over FY21, as coking coal is imported and supply is quite concentrated with a few countries. While the fall in iron ore prices is likely to support gross margins, the conversion costs will remain high due to higher fixed cost per tonne. However, Ind-Ra expects the overall demand to gradually recover in 2HFY21 on the back of a recovery in government and consumer spending.  The agency estimates TSLPL’s standalone EBITDA/tonne to range between INR2,000 and INR2,500 in FY21 (FY20: INR4,500). 

 

Leverage to Increase in FY20: Ind-Ra also expects TSLPL’s consolidated adjusted net leverage (adjusted debt net of cash/EBITDAR) to remain elevated and increase over FY21 (FY20 estimate: 5.8x; FY19: negative), due to the likely fall in demand growth and per tonne margins that follows the completion of substantial debt-funded acquisition in April 2019. However, the company does not have any further planned capex as on date.

 

Liquidity Indicator - Adequate: The agency expects TSLPL’s liquidity to be sufficient to support funding fixed costs during the lockdown and ramp-up period. The company has entirely refinanced the funding of the Usha Martin Limited’s (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. TSLPL’s scheduled annual repayment amounts to only INR0.53 billion in FY21 (FY22: INR1.3 billion), and hence, the company might not need to refinance its debt maturities. The agency expects the incremental working capital requirements to inch up in the near term with the rise in inventory levels and increase in the receivable period, although the impact of these factors would be partly offset by a fall in commodity prices. TSLPL had unused working capital lines of INR4.7 billion as on 30 September 2019. Though the re-financing needs are limited, the agency expects TSLPL to maintain liquidity buffers to protect itself from a prolonged weakness in demand.

 

Strong Strategic and Operational Linkages: The agency believes TSLPL is of strategic importance to TSL, as it is a part of the latter’s strategy to expand its presence in the long product business. Post the acquisition of UML’s steel division, the company’s name was changed to TSLPL (to include Tata Steel) from Tata Sponge Iron Limited. TSL’s shareholding in TSLPL increased to 75.91% (54.5% prior to the rights issue) post 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 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 had relied on its sponge iron semi products division for revenue. Furthermore, the acquired iron ore and coal mines would enable TSLPL to increase the captive raw material supplies.


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

TSL (formerly Tata Sponge Iron Limited), was established in 1974. The company has an annual steel-making capacity of one million tonnes and produces steel products, including forgings, bearings, fasteners and free-cutting. It caters to diverse sectors such as construction, railways, power, auto, general engineering and defence, infra.

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/Outlook

Rating Type

Rated Limits (billion)

Rating

11 November 2019

21 December 2018

Issuer rating

Long-term

-

IND AA/Negative

IND AA/Stable

-

Term loan

Long-term

INR30

IND AA/Negative

IND AA/Stable

-

Proposed working capital limits

Long-term/Short-term

INR12.02

Provisional IND AA/Negative/Provisional IND A1+

Provisional IND AA/Stable/Provisional IND A1+

-

Fund-based limits

Long-term

INR4.7

IND AA/Negative

IND AA/Stable

-

Non-fund-based limits

Short-term

INR3.28

IND A1+

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

    Ankur Dahiya

    Manager – Corporate Communication
    +91 22 40356121