S&P downgrades Tata Steel to 'BB-' on weak operating performance

New Delhi: Rating agency Standard & Poor's (S&P) Wednesday downgraded steel major Tata Steel to 'BB-', a low investment grade rating, over persistent subdued operating performance amid subdued demand and low steel prices.

The agency lowered its long-term corporate credit rating on Tata Steel to 'BB-' from 'BB', adding that the outlook for the Mumbai-based firm is stable.

S&P also lowered its long-term corporate credit rating on Tata Steel UK Holdings to 'B+' from 'BB-' but maintained a stable outlook on the firm struggling with high debt and lower sales. The rating on Tata Steel UK has been lowered following the downgrade of its parent Tata Steel, the agency said.

"We downgraded Tata Steel because we expect the company's weak cash flows and compressed profitability to keep its leverage high over the next 12-18 months," S&P Credit Analyst Vishal Kulkarni said in a statement.

The ratings agency lowered its assessment of the firm's financial risk profile to highly leveraged from aggressive to reflect its weakened cash flow leverage ratios, he added.

"Subdued demand and low steel prices have kept operating performance weak at Tata Steel's India and European operations. We expect the company's operating performance to improve, but only gradually, beginning in fiscal 2017 (year ending March 31, 2017)," Kulkarni said.

Profitability at Tata Steel's backward integrated India operations has suffered by the more than 40 percent fall in the average selling prices of steel in the domestic market over the past 18 months.

Steel prices have come down globally in line with the decline in iron ore and coking coal prices. Besides, demand is likely to stay subdued and production volumes should remain largely stable, S&P said.

"Tata Steel's new steel facility in the state of Odisha has been delayed and will now come on-stream in the last quarter of fiscal 2016, more than a year later than we had previously expected," Kulkarni said.

"We expect the company's debt to remain high and free operating cash flows to remain negative until fiscal 2018," he added.

Tata Steel's European operations continue to face tough operating conditions. Volumes were slightly low as demand remained sluggish and imports increased, he said.