Greenfield expansion, restructuring of UK operations to drive Tata Steel earnings improvement – Moody’s

Moody’s Investors Service said its ratings on Tata Steel Ltd and Tata Steel UK Holdings Limited remain unchanged despite their weak operating results for the full year ending March 2016 (FY2016), as the numbers were in line with its revised expectations in February at the time of a ratings downgrade.

Tata Steel reported consolidated revenue of INR1,172 billion and consolidated underlying EBITDA of INR79 billion, down 16 percent and 39 percent respectively from a year ago. Although, the results for the quarter ended March 2016 (QE3/2016) showed a substantial improvement over the previous trailing quarter with consolidated revenue and EBITDA of INR295 billion and INR23 billion, an increase of 5 percent and 171 percent respectively. The improvement in the operating performance was a result of the general uptick in global steel prices in February and March, after an all-time dip in January.

“We estimate consolidated adjusted leverage of 8.7x at March 2016, slightly below the peak of 9.0x at December 2015. Looking ahead into FY2017 we expect leverage to correct towards 6.5x-7.5x,” said Kaustubh Chaubal, a Moody’s Vice President and Senior Analyst.

Tata Steel’s reported gross debt of INR862 billion at March 2016 rose by only INR55 billion from March 2015 debt levels, despite capital expenditure of INR115 billion and weak operations during the year.

“The proposed sale of the long products business to Greybull Capital (unrated) and the company’s intention to sell its UK business are credit positive, although there is no immediate impact on our ratings or outlook,” added Chaubal, who is also the Lead Analyst for Tata Steel and TSUKH.

“The divestment of the loss making operations will reduce the drag on the European business’ profitability which has been under strain for a while; although much is unknown about the divestment contours including debt and pension liabilities to be transferred, which in particular will drive the impact, if any, on the ratings and outlook on Tata Steel and TSUKH,” he said.

Tata Steel’s India (TSI) business revenues and underlying EBITDA of INR382 billion and INR74 billion were down 9 percent and 27 percent from last year. EBITDA/tonne of INR7,744 for the full year was down 33%, although for QE3/2016 was higher by INR1,563 over the previous trailing quarter and represented price increases effected in February and March.

Tata Steel’s European operations reported revenue of INR674 billion and underlying EBITDA loss of INR6 billion, down 16% and 115% respectively for fiscal 2016. Steel prices in Europe also remained weak with cheaper imports from China and Russia. Tata Steel’s European operations registered a sharp 115% drop in its EBITDA/tonne to negative INR439 in FY2016.

“In our view, continuing protectionist measures are imperative especially as global steel over supply prevails, exerting pressure on prices globally,” Moody’s said in a note.

In India, we see the extension of the safeguard duty for three years until 2019 from an initial 200 day period, the imposition of an minimum import price (MIP) on some 173 grades of steel imports (in its current form until early August 2016), and a possible antidumping duty, as a reflection of continuing support for the ailing steel sector, it added.

In Europe, Moody’s expects the European Union’s (EU) anti-dumping duties on steel imports from China and Russia to provide some support to steel prices.

Increase in TSI’s production with the commissioning of 3 million tonnes per annum (3mtpa) greenfield expansion at Kalinganagar, which started commercial production in May 2016, a higher proportion of value added products in its product basket, and the expected completion of the restructuring of Tata Steel Europe will drive earnings expansion for Tata Steel and TSUKH and lead the path towards leverage correction.

Tata Steel is in a midst of vetting bids for the UK operations, which it put on sale at the end of March due to contnuing losses and difficult market dynamics, including dumping of cheap steel by China.


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