Tata Steel shares rose higher by 2.24 per cent, or Rs 2.85, at Rs 130.20, in Tuesday morning after brokerage firm Moody’s assigned a Baa3 long-term issuer rating to the company and changed the outlook to stable from positive.
The steelmaker’s long-term rating was upgraded to ‘Baa3’ from ‘Ba1’, the rating agency said in a statement on September 25. “The upgrade reflects our expectation of the continued strength in Tata Steel’s credit profile due to the company’s solid market position in India.”
“We expect the company’s profitability to increase even as softer steel prices dent revenues,” Kaustubh Chaubal, Moody’s Senior Vice-President, said in a press release.
Moody’s also said that its rating reflects the company’s large-scale globally cost-competitive, vertically integrated steel operations in India.
The credit rating agency also noted that the new rating is attributed to the consistent growth of Tata Steel’s European operations, along with the closure of unprofitable upstream operations in the UK. Additionally, it is influenced by the company’s strong association with its parent organization, Tata Sons.
The upgrade to investment grade also reflects Tata Steel’s resilient operations amid a challenging industry environment.
During FY23, Tata Steel’s EBITDA halved to Rs 31,700 crore and its cash flow from operations declined by almost 60 per cent to Rs 16,300 crore
Still, the company’s gross debt levels climbed by only 10 per cent, following the Rs 12,000 crore ($1.4 billion) acquisition of Neelachal Ispat Nigam Ltd (NINL), completed in July 2022.
Tata Steel’s India operations continue to dominate its consolidated earnings. Although two-thirds of the company’s 28.8 million metric tons (mt) of global steel shipments in FY23 were in India, Tata Steel India accounted for over 80 per cent of the company’s consolidated EBITDA.
“Meanwhile, Tata Steel’s European operations (TSE) lack backward integration and have historically generated volatile earnings, a drag on the company’s credit profile,” Moody’s further said.
The likely improvement in its UK cost structure and the relatively better performing Dutch operations will ensure, in Moody’s view, Tata Steel’s solid credit profile, even as steel prices remain soft and global steel demand weakens amid rising interest rates and a weak economic outlook in most end-user markets.
“Even as substantial capital expenditure continues, Tata Steel will still generate large free cash flow, enabling debt reduction with consolidated debt/EBITDA leverage comfortably below 2–2.5x over the next two fiscal years,” the rating agency noted.
Tata Steel’s stock performance on Tuesday is in contrast to its performance in the last five trade sessions when it slid 1.06 per cent. However, the share has soared 10.71 per cent in the last one month and 27.27 per cent in the last six months. The stock has been up 9.18 per cent year-to-date, while it has skyrocketed 30.40 per cent in the last one year.
The Nifty 50 benchmark, meanwhile, has slid 1.69 per cent in the last five sessions, while it has risen 2.01 per cent in the last one month. The benchmark index has soared 15.94 per cent in the six-month period, while its rise year-to-date has been 8.22 per cent. The index has jumped 15.74 per cent in the last one year.
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