New Delhi: Standard & Poor's on Thursday lowered the outlook of Tata Steel and its UK-based subsidiary TSUKH to 'negative' from 'stable' citing continued weak performance.
"We assess Tata Steel on a consolidated basis, including Tata Steel UK Holdings (TSUKH), which represents about half of the company's total consolidated assets. We expect the company's consolidated profit margin to continue to be weak, resulting in its debt-to-EBITDA ratio staying above 4 times," Standard & Poor's (S&P) said in a statement.
The ratings agency said it expected the company's profit margins to improve when the "company's India operations receive the full benefit of a recently commissioned 3 million tonne annual capacity". These benefits are expected to accrue only in the fiscal year ending March 31, 2014, it added.
S&P also affirmed its 'BB' long-term corporate credit rating on Tata Steel and its 'BB' issue rating on the company's senior unsecured notes.
'BB' generally indicates less vulnerability in the near-term but faces major ongoing uncertainties to adverse business, financial and economic conditions.
At the same time, it also lowered the recovery rating on TSUKH's pound 3.53 billion bank loan to '2' from '1' and the issue rating to 'BB-' from 'BB', the statement said.
"We revised the outlooks to reflect the poor performance of Tata Steel's wholly owned European subsidiary, TSUKH," said Standard & Poor's credit analyst Suzanne Smith.
The rating agency said it may lower the rating on Tata Steel if the company's consolidated operating performance does not recover in line with its expectations.
This is likely to be due to further slowing in the European operations, it said adding, "A double dip in the European economy or worsening steel industry conditions in India would result in EBITDA per tonne of about USD 300 or lower, further hurting Tata Steel's financial ratios."
The S&P said it may revise the outlook to stable when it expected the company to improve its operating performance in line with its earlier expectations, resulting in a ratio of adjusted debt to EBITDA of about 4 times and funds from operations to adjusted debt of more than 15 per cent.
"In our view, the European steel industry will continue to face soft demand and excess steel-making capacity for the next one to two years. We therefore expect TSUKH to continue to have a very low margin of 2.3 per cent in the fiscal year ending March 31, 2013," it added.
Limited pricing flexibility, slower-than-expected growth in sales at the India operations following brownfield capacity expansion, and lower volumes in Europe will keep EBITDA margin at about 12 per cent in fiscal 2013."
S&P said, "We also expect Tata Steel to generate negative free operating cash flow of Rs 60 billion in fiscal 2013, resulting in only a gradual recovery in the company's financial metrics".
We expect the ratio of debt to EBITDA to recover to 4.5 times in fiscal 2013 and 3.5 times in fiscal 2014, it added.
Saying that the improvements will be mostly driven by growth in India operations, the company assessed Tata Steel's liquidity as "adequate," and stated that Tata Steel has adequate resources and willingness to ensure that liquidity at TSUKH is also adequate.
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