India Ratings and Research (Ind-Ra) believes Tata Steel Limited’s (TSL; ‘IND AA’/Stable/‘IND A1+’) consolidated credit profile will remain stable in FY20, on the back of steady operating performance resulting from high capacity utilisation and robust profitability. The agency expects near full capacity utilisation of TSL India operations and integration of the acquired assets to support cash flows from operations, amid the likely softening of realisations. TSL’s India business sales volume mix increased to 61% in FY19 from 48% in FY18.
May 2019, TSL announced to call-off the proposed JV carving out TSL’s European
operations. While TSL continuation of European operations has increased the
business profile risk, the financial leverage will not change materially. TSL’s
management has notified to continue to look for options to reduce exposure to
Europe. The agency views the calling of the
JV to be a credit negative as it delays the company’s effort to hive-off or
substantially curtail the UK operations.
European Operations Outlook: TSL’s European operations, especially UK operations, face stiff competition from imports, are not backward integrated and have high operational overheads leading to a high volatility in margins. However, TSL has taken substantial business restructuring measures since FY15 which has reduced the capacity to 12.1mt from 17.9mt via sale of loss-making assets and restructuring of British Steel Pension Scheme. European operations sustained EBITDA/tonne of over INR4,900 in FY18. The agency assumes the EBITDA/tonne to decline to about INR4,000 in FY20-FY21 from INR5,900 in FY19, reflecting the risk of softening global demand and prices. In FY19, the European operations had 9.6mt production with about 3mt coming from the UK assets, which did not generate positive cash flows.
Domestic Focus: TSL’s stronger domestic sales mix has increased in FY19 post Bhushan Steel Limited’s and will further improve in FY20 with Usha Martin Limited’s (UML; ‘IND BB+’/Rating Watch Positive) steel division acquisitions. The proposed stake sale of the South-East Asian operations also contributed to India orientation of the group. In terms of the EBITDA mix, it is likely to be 85:15 in FY20 compared to 77:23 in FY19 (FY18: 72:28) from India and outside India operations. Its domestic operations are well-integrated with captive power and mining operations, which meet 100% of its iron ore requirements and about 29% of its metallurgical coal requirements (excluding Tata Steel BSL and UML). Consequently, TSL’s India operations are also among world’s low-cost steel producers.
EBITDA per Tonne to have Peaked in FY19: Ind-Ra expects the consolidated profitability to decline in the near-to-medium term owing to the benign global growth and the consequent fall in realisation. However, strong domestic demand, integration of BSL and steady share of branded/value-added products (FY19: 42.5%) will enable TSL to post strong cash flows in India. The agency estimates TSL’s standalone capacity utilisation to remain near full in FY20 (FY19: 100%) and the EBITDA/tonne to range between INR13,000 and INR14,000 for India operations (FY19: INR16,360). Ind-Ra has assumed the EBITDA/tonne at BSL to be about INR9,500 in FY20 (FY19: INR9,360; FY18: INR6,036), underpinned by an increase in capacity utilisation and captive iron ore supplies.
Financial Leverage to Inch Up; Although Remain Comfortable: Ind-Ra expects TSL’s consolidated net leverage (adjusted debt net of cash/EBITDAR) to remain elevated during FY20-FY21, on the back of partly debt-funded acquisition of BSL and the steel division UML, and annual investment of INR100 billion-90 billion in capacity expansion and maintenance. The adjusted net leverage is likely to increase to 3.4-3.7x over FY20 (FY19: 3.3x; FY18: 3.3x, FY17: 5.6x). TSL’s INR235 billion capital expenditure programme to expand capacity at its Kalinganagar facility by 5mtpa to 8mtpa over FY19-FY23 will start seeing material cash outflows starting FY20. The agency has not assumed any major inorganic growth-related capital outflows in its base case. In FY19, the European operations generated an EBITDA of INR54 billion with a gross debt balance of INR181 billion at end-March 2019.
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