New Delhi [India], July 13 : Fitch Ratings has revised the Outlook on Tata Steel Limited's (TSL) Issuer Default Rating (IDR) from Stable to Negative while affirming the rating at 'BBB-'.
This adjustment reflects growing concerns over the company's ability to effectively turn around its UK operations amid ongoing challenges that could hinder its financial recovery.
The revision comes as 12 out of 22 states in India report inflation exceeding the national average, underscoring regional economic disparities.
Tata Steel's UK operations have been a significant drag on its overall performance, exacerbated by a major loss in Europe and a prolonged maintenance shutdown at its Netherlands facility. This downturn in European operations has contributed to a substantial drop in EBITDA, falling nearly 30 per cent in FY24.
Fitch forecasts TSL's EBITDA leverage to improve to 2.9x by the financial year ending March 2025 (FY25), down from 4.0x in FY24.
However, this improvement remains precariously close to the 3.0x threshold, which could trigger further negative rating actions.
The agency anticipates FY25 EBITDA to rise by approximately 50 per cent to Rs 311 billion, primarily driven by robust growth in Indian operations and improved profitability in the Netherlands.
One of the main challenges TSL faces is the uncertainty surrounding its UK operations, particularly the planned transition from traditional blast furnaces to more cost-efficient electric arc furnace (EAF) technology at its Port Talbot facility.
Delays in this transition could lead to sustained EBITDA losses, hampering the company's turnaround plans.
Despite these challenges, Fitch remains optimistic about TSL's Indian operations. The company is projected to benefit from significant raw material self-sufficiency and low production costs at its Jamshedpur and Kalinganagar plants.
These plants rank among the lowest-cost steel producers globally, giving TSL a competitive edge in a volatile market.
Fitch anticipates TSL's sales volumes to grow by 5 per cent in FY25, driven by the commissioning of additional capacity at the Kalinganagar plant.
The company is expected to maintain a flat capital expenditure (capex) of Rs 182 billion in FY25, with projections for an increase in subsequent years.
However, negative free cash flow is expected due to ongoing investments in capacity expansion and restructuring costs in the UK.
TSL's credit profile benefits from the strategic support of the Tata Group, which holds a 33 per cent stake in the company. This relationship provides a one-notch uplift to TSL's IDR, reflecting the group's vested interest in TSL's stability and growth.
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