Tata Steel's leverage is likely to remain high in coming quarters: Moody's

Highlights:

* "We expect that Tata Steel’s consolidated earnings will continue to improve, such that leverage will fall towards 7.0x by March 2017, and approach 6.0x over the next 6-9 months," Moody's said in a statement. 

* "But even at these improved levels, leverage remains high and exceeds the 4.5x-5.0x needed to change the company’s rating outlook to stable from negative," it said. 

* "Looking ahead, we expect the production ramp-up phase of the Kalinganagar operations, and the resulting absorption of fixed costs to translate into improvement in EBITDA per tonne over the coming quarters," Moody's said. 

*Moody's 'Ba3 negative' rating for Tata Steel and 'B3 negative' rating for Tata Steel UK Holdings has remained unchanged. 

Even though Tata Steel has reported improvement in its operating performance for the third quarter (Q3) of the fiscal year 2016-17 (FY17), the company's leverage is projected to remain high in the coming quarters, Moody's Investors Services said in its latest research report on Thursday. 

Factors such as the Government of India's measures to curb steel imports from countries like China, positive movement across global steel markets since April last year and its greenfield expansion at Kalinganagar helped Tata Steel to improve its operating performance during the said quarter. 

According to Moody's, the company's consolidated revenue for the third quarter (Q3) ended on December 31, 2016, was Rs 29,400 crore and consolidated underlying earnings before interest, tax, depreciation and amortisation (EBITDA) was Rs 3,600 crore, whereby they rose at 14% and 4x, respectively.  

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"The recent improvement in consolidated revenue of Tata Steel reflects the consistent improvement in performance, backed by an expansion of its Indian operations and a turnaround of its European EBITDA,"it said. 

For the April to December 2016 period of FY17, Tata Steel reported consolidated revenue of Rs 83,200 crore and consolidated underlying EBITDA of Rs 9,800 crore, whereby they grew at 3% and 90%, respectively from a year-ago period. 

"We estimate Tata Steel’s consolidated adjusted leverage of 7.9x as of December 2016, continuing to decline from 14.5x as of March 2016 and 10.2x as of September 2016," cited Moody's in a research note.

The ratings agency has projected Tata Steel's consolidated earnings to improve in the coming quarters.

"We expect that Tata Steel’s consolidated earnings will continue to improve, such that leverage will fall towards 7.0x by March 2017, and approach 6.0x over the next 6-9 months," Moody's said in a statement. 

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"But even at these improved levels, leverage remains high and exceeds the 4.5x-5.0x needed to change the company’s rating outlook to stable from negative," it further added. 

Moody's 'Ba3 negative' rating for Tata Steel and 'B3 negative' rating for Tata Steel UK Holdings has remained unchanged. 

Tata Steel's expansion of steel production from Kalinganagar facility and recovery in regional steel prices helped the company to report increase in its revenues and EBITDA for the nine months of FY17.

"Tata Steel India's revenues and EBITDA of Rs 36,100 crore and Rs 7,600 crore for April-December 2016 were up 17% and 37% from the same time the year before. And, EBITDA per tonne of Rs 9,834 for April-December 2016 was up 21%, notably driven by the recovery in regional steel prices and the ramp up in production at the company’s greenfield expansion at Kalinganagar," Moody's said in a note.

During the third quarter (Q3) of FY17, the company's EBITDA per tonne of Rs 11,332 was higher by Rs 3,712 over the previous trailing quarter, recovering from the seasonally weak monsoon quarter, it noted.

Tata Steel India's Kalinganagar plant crossed 1.0 million tonnes of hot rolled coil production since commissioning in May 2016, and the company upgraded its guidance for FY17 to 1.5 million tonnes from the earlier 1.3 million tonnes. 

The ratings agency has predicted Tata Steel's EBITDA to improve in the coming quarters on the back of increase in steel production from Kalinganagar facility.

"Looking ahead, we expect the production ramp-up phase of the Kalinganagar operations, and the resulting absorption of fixed costs to translate into improvement in EBITDA per tonne over the coming quarters," Moody's said. 

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