Steel giant- Tata Steel's outlook upgraded by Moody's

Moody's has upgraded steel giant - Tata Steel Ltd’s outlook from stable to positive. Furthermore, Moody's has affirmed Tata Steel's Ba1 rating. The rating agency has stated, ‘Tata Steel's track record of delivering a solid operating performance while maintaining conservative financial policies’ is the reason for change in the outlook. Additionally a senior VP at Moody’s said that, ‘the likelihood that upward rating pressure will build over the next 12 months if recent performance and credit metrics improvements are sustained,".

Financial Outlook - The company’s current gross debt stands at INR 75,561 crore while the net debt stands INR 51,049 crore. It plans to lower its debt by at least $1.0 billion/INR 7,700 crore in the fiscal year that ends in March 2023. The EBITDA margins improved significantly from 20% in FY 21 to 26% in FY 22. The impact of higher EBITDA resulted a higher interest coverage ratio which jumped from approx. 3 to 10 within a year of FY 2022. The all time high profits added to the equity portion only to reduce the Net Debt/Equity Ratio to 0.52 and Net Debt/EBITDA ratio to 0.80.

Industry Outlook – The steel industry is expected to continue having a robust demand. The reduced production in China will increase the opportunities for the second largest steel producer across globe – India. Although, Tata steel was set to gain from such opportunities however, the domestic steel prices have been lowered by a rise in Indian steel export tax levies.

Raw Material – Due to geopolitical tensions in Russia, supply of coking coal, which is one of the main raw materials for steel production, is set to remain volatile impacting the prices in global markets. On other hand, Iron Ore prices are expected to remain range bound. The energy prices in Europe will remain high due to sanctions imposed on Russia hence impacting the production costs.

Stock Price – After a correction of around 44%, the company continues to trade at a Price/Book value of 0.98 and providing a dividend yield of approx. 5.60%. The stock Price/Earning ratio is currently at 2.74.