By Rohit Sadaka

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

Long-term loan

31 March 2031

INR13.25 (reduced from INR29)

IND AA/Stable

Affirmed; Outlook revised to Stable

Proposed long term loan

-

-

 

INR1

IND AA/Stable

Assigned final rating; Outlook revised to Stable

Fund-based limits$

INR10.35

(increased from INR4.7)

IND AA/Stable

Affirmed, Outlook revised to Stable

Non-fund-based limits

INR5.50

(increased from INR3.28)

IND A1+

Affirmed

Proposed working capital#*

INR 19.90

(increased from INR12.02)

IND AA/Stable/ IND A1+

Assigned; Outlook revised to Stable

Commercial paper

30-180 days

INR7

IND A1+

Affirmed


*The provisional ratings of the proposed bank facilities have been converted to final ratings as per Ind-Ra’s updated policy. This is because the debt seniority and general terms and conditions of working capital facilities are likely to be the same as those of the existing ones.

# 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'/Stable; holds 74.91%).

 

The Outlook revision reflects a similar rating action on TSL, because of its improving credit profile owing to strong realisation on the back of robust demand from key end-user segments, including construction/infrastructure, automobiles and white goods. Furthermore, TSLPL’s profitability and credit metrics improved during 9MFY21.

 

KEY RATING DRIVERS

Strong Parentage and 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. TSLPL was a 74.91% owned subsidiary of TSL at end-December 2020 (54.5% prior to the FY20 rights issue). As envisaged, TSL supported TSLPL by an equity infusion of INR14.85 billion for the acquisition of Usha Martin Limited’s (UML; IND A-’/Stable) steel division in FY20. In continuation of this strategy, TSL announced, on 13 November 2020, the merger of its subsidiaries Tata Metaliks Limited (TML) and Indian Steel and Wire Products Limited (ISWP) into TSLPL. 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 proximity of TSL’s Jamshedpur facility to TSLPL’s units brings about operational efficiencies. TSLPL also procures a substantial portion of its Joda plant’s iron ore requirement from TSL.

TML’s Merger into TSLPL to improve  Business Profile and Boost Synergies: Post the merger of TML into TSLPL, the latter’s product portfolio will be enhanced with the sale of ductile iron pipe, allied products and pig iron, in addition to its existing alloy steel and sponge iron division. This diversifies the end-user industry concentration risk significantly and acts as a protection against a slowdown in a particular/correlated user industry. TML’s 15%-20% total coke requirement (around 3,000 tonne-4,000 tonne per month) is being met through TSLPL while the remaining is being produced internally. Post TSLPL’s merger with TML, these linkages will be streamlined and will have an overall positive impact on raw material sufficiency. 

Efficient Raw Material Procurement: TSLPL’s captive iron ore mine (Vijay-II) fulfils a majority (70%-80%) of the iron ore requirement at the Gamaharia plant (environment clearance limit of 2.5mtpa). TSLPL’s Joda plant’s substantial iron ore requirement is met through TSL’s mines. The original mining lease executed in favour of UML is valid up to 2025 and can be further extended by 30 years i.e. 2055 (as per the new Mines and Minerals (Development and Regulation) Act). TSLPL sources all its other major raw material through T S Global Procurement Company Pte Ltd (TSGP; ‘IND AA-’/Negative), which consolidates the group requirement and negotiates the best deal for the entire group. TSGP has established a judicious balance of long-term and spot buy, which protects it against price fluctuations. With the support of TSL’s strategic procurement  and process improvement teams, a unified specification across the Tata Steel group for sourcing is well-managed and requirements are synchronised for ports and shipments, thereby optimising the logistics cost. 

Liquidity Indicator - Adequate:  TSLPL’s limits are interchangeable between  fund and non-fund based. Due to its adequate liquidity, TSLPL makes limited use of its fund-based facilities while largely using its non-fund-based facilities. The overall average utilisation of TSLPL’s working capital limits was around 50% for the 12 months ended January 2021. TSLPL’s liquidity position has improved substantially since 2QFY21, on the back of its improved cash flows from operation that are estimated to have been INR5.2 billion in FY21 (FY20: negative INR5.6 billion; FY19: INR1.45 billion).  This has enabled TSLPL to start prepaying its term debt, for which, the repayments are due only post FY27. The debt service coverage ratio is comfortable above 5x over FY21-FY22, due to fewer repayment obligations and improved operational cash flow. The company does not have any capital market exposure and relies on banking channels to meet funding requirements. The incremental operational cash flows generated post its merger with TML and ISWP will significantly improve TSLPL’s liquidity, with both the entities having limited term debt. 

Improved Operational Performance: During 9MFY21, TSLPL earned a revenue of INR32,031 million (FY20: INR34,899.9 million) and an EBITDA of INR6,005.9 million (INR1,532.5 million). The EBITDA margin improved to 18.75% during 9MFY21 (FY20: 4.39%) and the blended EBITDA per tonne jumped to INR9,976 (FY20: INR2,248). The EBITDA improvement was on account of an around 13% yoy increase in the blended realisation during 9MFY21 and higher sales volume of 0.93mt (9MFY20: 0.83mt), resulting in the better absorption of fixed cost. 

Strong FY22 Demand Outlook:  The agency expects the domestic consumption growth to recover substantially in FY22, driven by strong demand growth from construction, real estate, automobiles and consumer durables segments, strong government spending and the availability of credit support demand growth in these end-user segments. This will support capacity utilisations in FY22. However, the normalisation of metal prices, amid raw material cost inflation, is likely to moderate per tonne margins through FY22; however, they are likely to be elevated and higher than FY20 levels. The sharp increase in coking coal and sticky iron ore prices, if any could pressurise gross margins in FY22.

Comfortable Credit Metrics: TSLPL's credit metrics are likely to have improved significantly in FY21 with the interest cover of around 5x (FY20: 0.52x) and the net leverage (net debt/EBITDA) of around 1.0x (16.9x). The improvement would have been on the back of an increase in the sales volume from the UML's plant acquired in FY20, as well as a surge in sales realisation during 2HFY21, resulting in higher EBITDA. During 9MFY21, the EBIDTA margin improved to 18.75% (FY20: 4.39%). The credit metrics are likely to improve further in FY22 with no major debt-led capex and the expectation of sustained EBITDA.

Inherent Industry Risk: The domestic steel sector can be characterised by its sustainable cyclicality in demand, raw material and metal price volatility, high regulatory risk and the risk of high imports into the country. The sector participants typically have high operating and financial leverage, large working capital requirements and large-sized debt capital funding of the capital expansion.


RATING SENSITIVITIES

Positive: Any upgrade in TSL’s rating could lead to a positive rating action.

Negative: TSLPL’s ratings will continue to move in tandem with TSL’s. Any 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 high-grade sponge iron and is also sells surplus power. Furthermore, in April 2019, the company acquired the steel division of UML engaged in the long products steel business segment.

FINANCIAL SUMMARY

Particulars

9MFY21

FY20

FY19

Revenue (INR million)

32,031

34,900

9,920.5

EBITDA (INR million)

6,006

1,533

1,446.9

EBITDA margin (%)

18.75

4.4

14.6

Gross EBITDAR interest coverage (x)

3.18

0.52

47.9

Net leverage (x)

-

16.87

-2

Source: TSLPL



RATING HISTORY

Instrument Type

Current Rating/Outlook

Historical Rating

Rating Type

Rated Limits (billion)

Rating

17 April 2020

11 November 2019

21 December 2018

Issuer rating

Long-term

-

IND AA/Stable

IND AA/Negative

IND AA/Stable

-

Term loan

Long-term

INR14.25

IND AA/Stable

IND AA/Negative

IND AA/Stable

-

Proposed working capital limits

Long-term/Short-term

INR19.90

IND AA/Stable/ IND A1+

Provisional IND AA/Negative/Provisional IND A1+

Provisional IND AA/Stable/Provisional IND A1+

-

Fund-based limits

Long-term

INR10.35

IND AA/Stable

IND AA/Negative

IND AA/Stable

-

Non-fund-based limits

Short-term

INR5.5

IND A1+

IND A1+

IND A1+

-

CP

Short-term

INR7

IND A1+

IND A1+

IND A1+

IND A1+



COMPLEXITY LEVEL OF INSTRUMENTS

Instrument Type

Complexity Indicator

CP

Low

Fund-based limits

Low

Non-fund-based limits

Low

Term loans

Low

Proposed working capital limit

Low


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. 

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Analyst Names

  • Primary Analyst

    Rohit Sadaka

    Director
    India Ratings and Research Pvt Ltd Room no - 1201, 12th Floor, OM Towers, 32 Chowringhee Road, Kolkata-700071, India
    +91 33 40302503

    Media Relation

    Ankur Dahiya

    Manager – Corporate Communication
    +91 22 40356121