Moody’s cautiously upgrades Tata Steel’s rating outlook to positive

27 Jun 2022

Moody’s Investors Service today said that it had changed the rating outlook on Tata Steel Ltd to positive from stable. The rating agency also retained Tata Steel’s Ba1 corporate family rating.

The rating outlook upgrade by a notch by Moody’s was based on its assumption that Tata Steel’s debt to earnings before interest, tax, depreciation, and amortisation ratio would remain below 1.5 times over the next two years while the company consistently generates positive free cash flow.

Moody’s was impressed by Tata Steel’s capital allocation policy that prioritised debt reduction over capital expenditure and new investments. But it said that it was still cautious in its forecasts for Tata Steel.

The rating outlook upgrade by Moody’s was after factoring in an EBITDA per tonne decline to $140-$150 in 2022-23 (Apr-Mar), and further to $40-$50 in 2023-24, from $180 in 2021-22.

Tata Steel’s EBITDA per tonne is estimated to decline due to lack of vertical integration at its European operations “and the wide swings in the business’ profitability in previous years,” said Moody’s.

Looking at Tata Steel’s liquidity metrics, the rating agency said that the company’s $3.1 bln in cash and liquid investments at the end of March 2022 indicated a good liquidity position.

But it cautioned that “given the inherently volatile steel industry, some unevenness in intra-year working capital is likely, which could lead the company (Tata Steel) to continue relying on short-term 364-day working capital facilities.”