New Delhi: Global rating agency Moody's Wednesday said outlook for Tata Steel remains negative as its Indian operations are facing pressure on margins due to slower growth in the domestic economy.
"The outlook on all ratings (of Tata Steel) remains negative... Moody's expectation is for the year ended March 2013 to reflect the nadir of Tata Steel's credit metrics," it said in a statement.
Moody's Vice President and Senior Credit Officer Alan Greene said that the performance of Tata Steel has been broadly in-line with rating agency's expectations, and Tata Steel UK Holdings (Tata Steel Europe) has been struggling with the moribund state of the European steel industry.
"...The Indian operations have increased output but are experiencing margin pressure in the face of slower Indian GDP growth," he added.
On Tuesday, another rating agency Fitch had also affirmed a negative outlook to Tata Steel, citing similar reasons.
According to Moody's, the results of Tata Steel for the nine month period ended December 2012 saw group revenues grow by 1.2 percent. But, steel deliveries declined to 17.6 million tonnes (MT), from 18 MT and with pre-tax profit 65 percent lower for the group, period on period.
However, the company's Indian and European operations are expected to post strong numbers for the fourth quarter, it said.
"Ramp-up of the Jamshedpur expansion has seen total Tata Steel India deliveries grow by 13 percent to 7.48 MT for FY'13 and following the relighting of the Port Talbot blast furnace in February, we expect Tata Steel Europe's deliveries to have recovered to at least 3.5 MT in Q4 and to over 13 MT for the year," it added.
Moody's cautioned however that "nevertheless, with no let up in the weak demand and overcapacity seen in Europe, there is a risk that the weakening of Tata Steel's credit metrics continues into FY 2014". It said that performance of Tata Steel Europe remains a "challenge for the group".
It affirmed Ba3 corporate family rating of Tata Steel Ltd and the B3 corporate family rating of Tata Steel Europe, while saying that the outlook remains negative for the steel major.
Moody's Ba3 rating is considered speculative in nature and indicates an elevated vulnerability to default risk. Besides, the B3 rating signifies a higher risk of default and greater risk to investors.
Talking about Indian operations of Tata Steel, Moody's said that it believes that the steel cycle in India is past the worst.
"If this is the case and Tata Steel India can return towards a sustained EBITDA of USD 300 per tonne or more -- which is one of the best margins seen among Moody's entire rated steel industry coverage -- then the burden of TSUKH (Tata Steel UK Holding) can probably be borne, without forcing the rating lower, assuming it can sustain positive EBITDA," it added.
Moreover, Moody's noted that Tata Steel India has been seeking Rs 23,000 crore of project finance for its new steelworks in Odisha's Kalinganagar and said that this would "ease the pressure on the standalone balance sheet".
The company also has other small holdings in various Tata group companies that it can monetise, the rating agency said.
First Published: Wednesday, April 17, 2013, 22:42