Fitch Ratings on October 9 upgraded Tata Steel Limited's Issuer Default Rating (IDR) from 'BB+' to 'BBB-'. Also, the rating agency has maintained a stable outlook in this context.
Additionally, the rating agency has upgraded the rating of $1 billion notes due in July 2024, which were issued by TSL's subsidiary, ABJA Investment Co. Pte. Ltd., and guaranteed by TSL, from 'BB+' to 'BBB-'.
The upgrade is a result of the revision in Tata Steel Limited's (TSL) Standalone Credit Profile (SCP) from 'bb' to 'bb+' due to reduced uncertainty and decreased financial risk associated with its UK operations.
Tata Steel's strategic shift towards replacing blast furnaces with more cost-effective and environmentally friendly electric arc furnace (EAF)-based steelmaking capacity is expected to enhance the cost competitiveness of its UK operations, the rating agency noted.
Fitch also said it's worth noting that Tata Steel's IDR enjoys a one-notch uplift due to the potential support it may receive from the Tata Group.
Fitch's decision to take these actions is based on the expectation of a substantial improvement in Tata Steel's profitability in the United Kingdom. According to Fitch, "TSL's plan to install EAF-based steelmaking capacity of 3 million tonnes per annum (mtpa) at Port Talbot, UK, within the next three-four years should allow the UK business to generate a profit even during industry downturns, instead of being a drag on TSL's financial performance."
Regarding the rationale for the rating, Fitch said Tata Steel's Indian operations secure nearly all of their iron ore needs and and 22% of their coal requirements through the company's mines, and its plants in Kalinganagar and Jamshedpur are among the lowest-cost assets in the world.
It added, "TSL's strong cost base in India grants it a significant competitive advantage amid volatile steel prices, underpinning its credit profile."
Fitch also anticipates that Tata Steel's average annual capital expenditure (capex) for the period spanning FY24 to FY26 will be approximately 30% higher than the FY23 figure of Rs 141 billion.
The rating agency anticipates a surge in sales volumes for Tata Steel in FY25 and FY26. Specifically, it projects a 2% increase in consolidated sales volumes for FY24. It said, "Volume growth in FY24 should be driven by the ramp-up of operations at Neelachal Ispat Nigam Limited, which was acquired in FY23, to close to its 1mtpa capacity. We expect volume to jump by 6% in FY25 and 7% in FY26, driven by the Kalinganagar expansion."
On the company's liquidity position and debt structure, the ratings firm said Tata Steel's strong banking relationships and ability to access financial markets will help alleviate concerns related to refinancing and liquidity risks.
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