In a significant development in the financial world, Moody’s Investors Service has upgraded Tata Steel Ltd to an investment grade, granting it a Baa3 long-term issuer rating. The renowned credit rating agency has also revised the outlook for the company from ‘Positive’ to ‘Stable.’ This upgrade comes as a result of Moody’s optimism regarding Tata Steel’s robust position in the domestic market, along with its strategic investments in expanding capacity in both India and Europe. Despite challenges posed by softer steel prices, Moody’s anticipates an increase in Tata Steel’s profitability. The company’s shares are expected to be in the spotlight following this positive rating change.
Moody’s Senior Vice President, Kaustubh Chaubal, expressed confidence in Tata Steel’s future performance, asserting that the company’s profitability would continue to grow, even amidst fluctuations in steel prices. He highlighted that the second-largest steel market globally, India, would play a pivotal role in Tata Steel’s credit profile. The country is projected to experience a cumulative annual growth rate of 7 percent in steel consumption until 2030. This growth is driven by ongoing large-scale infrastructure investments and a rising demand for steel from the automotive sector.
Furthermore, Moody’s emphasized that Tata Steel would remain financially resilient, generating substantial free cash flow. This ability to generate cash will enable the company to reduce its debt, keeping the consolidated debt-to-Ebitda leverage comfortably below 2 times to 2.5 times over the next two financial years.
Chaubal elaborated on the rating upgrade, stating that it reflects Tata Steel’s commitment to deleverage by reducing its gross debt. Moody’s expects the company to adhere to conservative financial policies, maintain a well-balanced approach to capital allocation, and exhibit financial metrics consistent with its Baa3 rating.
Tata Steel’s recent agreement with the UK government to decarbonize its 3 million tonne per annum (mtpa) steel plant in Port Talbot was also highlighted as a noteworthy development. Under this agreement, Tata Steel is set to receive a substantial grant of 500 million British pounds from the UK government. This grant will be invested in Electric Arc Furnace (EAF) steelmaking, with the total project cost estimated at 1.25 billion pounds.
While the transition to EAF steelmaking may involve some one-off restructuring costs, Moody’s views this move as highly beneficial for Tata Steel. It is expected to significantly enhance the company’s cost competitiveness in the UK market. Furthermore, the closure of the Blast Furnace (BF) will halt a considerable drain on earnings, resulting in a positive impact on Tata Steel’s credit profile.
In conclusion, Moody’s upgrade of Tata Steel to an investment grade and the revision of its outlook to ‘Stable’ underscores the company’s strong market position in India and its strategic investments. Despite challenges in the steel industry, Tata Steel is poised for continued growth and profitability. The company’s commitment to deleveraging and sound financial policies further solidify its creditworthiness. Additionally, the transformative decarbonization efforts in the UK are expected to contribute positively to Tata Steel’s financial performance. Investors and stakeholders are likely to take note of these developments as they assess Tata Steel’s future prospects in the global steel market.
