The Negative Outlook reflects TSL's higher-than-expected net financial leverage in FY13 (year end March) together with uncertainty regarding deleveraging in the near term.
Net adjusted leverage (net adjusted debt/operating EBITDAR) increased to 4.9x in FY13 (FY12: 4.3x) due to a decline in EBITDA margins in TSL's European operations to 1.0pc (2.2pc ) and Indian operations to 29pc (34pc ). Muted demand in Europe led to lower volumes.
Also, the company had to shut down of one of its blast furnaces in Europe during part of FY13. Ind-Ra expects the profitability to remain under pressure in the near term with slower volume growth in Europe and lower growth trajectory in the Indian markets.
Net leverage is likely to marginally improve in the short term while recovering below 4x in medium term, supported by increased volume in domestic operations from expanded capacity in Jamshedpur together with stabilisation in European and South East Asian operations.
TSL intends to manage its debt levels through internal accruals, divestments of assets and phasing out of capex. Any significant delay in deleveraging might be negative for the ratings.
The affirmation reflects TSL's low-cost Indian operations and strong liquidity. As on 30 June 2013, cash and cash equivalents amounted to INR101.8bn and undrawn committed facilities totalled INR69.66bn.
TSL also has access to domestic and international capital markets due to its established reputation.
Refinancing risk during FY14 and FY15 is minimal; however, major debt repayments in Tata Steel UK are due FY16 onwards and are likely to be refinanced well in advance.
TSL has arranged finance of INR228bn for its Kalinganagar project which is to be completed in two phases.
TSL's ratings continue to factor in one-notch benefit for its strong operating and strategic linkages with the Tata Group.
Positive: A Stable Outlook could result from improved profitability supported by an improvement in international demand and/or net financial leverage sustained below 4x.
Negative: Future developments that could lead to a negative rating action include:
- any significant pressure on profitability or large capex resulting in net financial leverage sustained above 4x
- any weakening of TSL's linkages with the Tata group and/or the group's inability to provide support to TSL
Established in 1907, Tata Steel is among the top 10 global steel companies with an annual crude steel capacity of over 29mtpa.
In FY13, revenue was INR1,347bn (FY12: INR1,329bn) and operating EBITDA margin was 9.1pc (9.3pc ).
- Long-Term Issuer Rating: affirmed at 'IND AA'; Outlook Negative
- INR20bn commercial paper*(increased from INR9.75bn): affirmed at Short-Term 'IND A1+'
- INR21.51bn non-convertible debentures (reduced from INR30bn): affirmed at Long-Term 'IND AA'
- INR6.2bn non-convertible debentures (reduced from INR20bn): affirmed at Long-Term 'IND AA'
- INR12.5bn non-convertible debentures: affirmed at Long-Term 'IND AA'
- INR43.49bn long-term debt (reduced from INR53.49bn): affirmed at Long-Term 'IND AA'
- INR15bn fund-based cash credit limits: affirmed at Long-Term 'IND AA'
- INR5bn non-fund-based limits: affirmed at Short-Term 'IND A1+'
- INR7.25bn fund-based limits: affirmed at Long-Term 'IND AA' and Short-Term 'IND A1+'
- INR81.39bn non-fund-based limits (reduced from INR89.87bn): affirmed at Long-Term 'IND AA' and Short-Term 'IND A1+'
- USD100m working capital limits: assigned Long-Term 'IND AA' and Short-Term 'IND A1+'
*Not carved out of any working capital limits.
--IBNS (Posted on 09-10-2013)