Ratings agency Moody's Investors Service on June 27 revised the outlook on Tata Steel to ‘positive’ from ‘stable’. At the same time, Moody's also affirmed Tata Steel's Ba1 corporate family rating (CFR).
"Today's outlook change to positive reflects Tata Steel's track record of delivering a solid operating performance while maintaining conservative financial policies; and the likelihood that upward rating pressure will build over the next 12 months if recent performance and credit metrics improvements are sustained," Kaustubh Chaubal, Moody's Senior Vice President, said in a press release.
Moody's expects the company to reduce its debt by at least $1.0 billion in the fiscal year ending March 2023 (fiscal 2023) -- aligned with its publicly articulated capital allocation policy.
"Tata Steel's well-laid-out capital allocation policy that prioritizes debt reduction over capital expenditure and new investments underscores our positive outlook. The substantial debt reduction achieved over the last two years, as well as the reduction to come over the remainder of fiscal 2023, will greatly improve the company's financial flexibility and resilience and position it for an investment-grade rating," Chaubal also said, the press release stated.
In its ratings rationale, Moody’s highlighted that market conditions will gradually moderate over the next 12-18 months.
The ratings firm said in its note that the structural improvement in Tata Steel's capital structure, with an absolute gross debt reduction and the substantial cash generated by the company during the last two fiscal years, has created a lasting buffer to the company's key credit metrics and liquidity, reducing the company's overall credit risk.
Moody’s said rising global interest rates to curb inflation and an increase in Indian steel export taxes have somewhat dampened steel prices. It also said its forecasts for Tata Steel are based on the rating agency's current price sensitivities for steel ($880 per ton for Tata Steel's Indian operations and $1,250/ton for Europe) for fiscal 2023.
Moody's has modeled per ton of metallurgical coal at $308 and iron ore at about $100. For fiscal 2024, it said its forecasts are based on the mid-point of its price sensitivity ranges ($600-$800/ton for steel, $80-$125 for iron ore and $110-$180 for metallurgical coal).
These price sensitivities translate into an EBITDA/ton assumption of $280 for fiscal 2023 and fiscal 2024 for Tata Steel's Indian operations, a 30% decline over fiscal 2022, Moody’s Investors Service said in its note.Moody's remains cautious in its forecasts and assumes that the business' EBITDA/ton will decline from $180 in fiscal 2022 to around $140 -$150 in fiscal 2023 and further slide to $40 -$50 in fiscal 2024.