Tata Steel's move to sell its long products business will reduce the cash losses of one of the world's largest steelmakers, but would not lower its debt, Standard & Poor's Ratings Services said on Thursday
New Delhi: Tata Steel's move to sell its long products business will reduce the cash losses of one of the world's largest steelmakers, but would not lower its debt, Standard & Poor's Ratings Services said on Thursday.
The proposed sale of its European long products (LP) division to UK-based investment firm Greybull Capital will help Tata Steel's long-term deleveraging plan, S&P said in a statement.
However, an improvement in operating performance of the group's India operations remains crucial for the company's credit profile, it said.
"We do not expect the sale to lower the debt at Tata Steel because the sale is agreed at a nominal valuation. Moreover we believe transfer of debt to the buyer is unlikely," the ratings agency's Credit Analyst Vishal Kulkarni said.
The proposed deal will stop Tata Steel's cash losses from the LP division and help somewhat improve profitability for the Europe operations, he added.
Earlier this week, Tata Steel announced it will sell the Long Products Europe business to investment firm Greybull Capital for a nominal amount of 1 pound. The transaction is likely to conclude by June this year.
The LP division is loss-making, resulting in significant cash losses and working capital needs. The group's India business provides cash support in the form of working capital to the Europe business, Kulkarni said.
"The gains for Tata Steel in terms of release of working capital and improvement in profitability will be more meaningful when the group sells the rest of its loss-making UK asset," he added.
Any one-off restructuring expenses, any pension-related or other settlement costs to be incurred by Tata Steel will also influence the benefits from the disposal of the UK assets. The rest of Tata Steel's UK business primarily comprises strip products and specialty bars businesses and a supply chain that is fed by a facility at Port Talbot, he said.
"Tata Steel's India business will continue to be a significant contributor to the group's consolidated cash flows," said Kulkarni adding "Our base-case financial projection is that the group's profitability per ton for its India operations will improve over the next two years following the government's various protection measures for the domestic steel sector over the past two quarters."
Continued and meaningful progress on sale of the UK assets, and better operating performance, especially at the India operations, will be key factors for the future rating transition, the agency added.