Strengthening of steel prices to support Tata Steel’s deleveraging: S&P

The rating agency, Standard & Poor’s, on Monday said that the continued strengthening of steel prices will support Tata Steel Ltd’s (BB-/Stable/–) commitment to deleverage.

The India-based company has guided for average prices to increase by about Rs 6,000–7,000 per ton quarter-over-quarter in the three months ending June 2021. This rise of nearly 10 per cent should push up EBITDA/ton for Tata Steel’s India operations to about Rs 30,000-32,000 for the quarter, about 2x the estimated mid-cycle profitability, the rating agency said in a statement.

Sustained steel prices at these levels could lead to upward rating pressure. In such a scenario, we would expect the company’s ratio of funds from operations (FFO) to debt to move above our upgrade trigger of more than 25 per cent, said the rating agency. Tata Steel stock was trading 2.64 per cent higher (over previous close) at Rs 1,213.14 per share on BSE.

However, Tata Steel is less likely to maintain the ratio above 25 per cent if steel prices normalise to mid-cycle levels such that EBITDA/ton is about half the current estimate.

Tata Steel has reiterated its commitment to reduce its debt by at least $ 1 billion a year, even as it resumes growth capital expenditure (capex).

“We believe the company could outperform this target in FY22 based on current steel prices and capex plans,” S&P added.

Tata Steel has indicated a total capex of Rs 11,000 crore for FY22, of which Rs Rs 7,500 crore will be for Indian operations. The company has announced resumption of its 5 million tonne a year expansion in Odisha, on which there is a residual capex of about $ 2 billion. Benefits from the expansion will accrue in phases from FY24.

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