Moody's retains negative outlook on Tata Steel ratings

Moneycontrol Bureau

Rating agency Moody's has reaffirmed its negative outlook on the credit ratings of  Tata Steel and Tata Steel UK Holdings. It had assigned the negative outlook to the companies in August 2012 and continues to maintain it.

"In the wake of weak demand and overcapacity seen in Europe, there is a risk that the weakening of Tata Steel's credit metrics continues in FY14," says the report, adding that the Indian operations too are experiencing margin pressures despite higher output, because of the slowing economy.

Moody's expects consolidated adjusted debt/EBIDTA (earnings before interest, depreciation, taxes and amortization) around 5.8 times for FY13 and expects for an improvement to 5.5 times in FY14.

"However, further erosion of credit metrics could precipitate a rating downgrade," says Alan Greene, Vice President Senior Credit Officer, Moody's.

The report also points out that the steel cycle at least in India is past its worst and if Tata Steel can return towards a sustained operating profit of USD 300 per tonne, then the burden of Tata Steel UK Holdings can be borne by Tata Steel.

Moody's believes Tata Steel UK Holdings remains a challenge for the group. "The European steel industry as a whole is suffering from underutilized capacity and Tata Steel UK Holdings along with other companies is looking for higher value added products and cost efficiencies in order to survive," said the report.

Greene believes the expansion of profitable parts of Tata Steel are getting impacted on emergence of funding constraints on account of Tata Steel UK Holdings losses. He suggests further actions like disposal of Teeside Cast Products in 2011 is needed in order to reverse Tata Steel UK Holdings cash outflow.

Moody's concludes the report saying that the Tata Steel's ratings are unlikely to go up in the near future, but could return to a stable outlook. However, negative ratings pressure could develop in the event of a worsening in the operating environment beyond ratings agency's expectations in the next six months.