"The upgrade to Ba1 reflects our view that Tata Steel's better-than-anticipated operating performance this fiscal year and a step-change reduction in gross debt have materially strengthened its credit metrics. We expect the company's leverage -- measured by consolidated debt/EBITDA to decline to 1.5x by March 2022 from 6.5x at March 2020, 3.3x at March 2021 and an estimated 2.1x at June 2021," says Kaustubh Chaubal, a Moody's Vice President and Senior Credit Officer.
"We project the company will continue to generate large and positive free cash flow from operations over the next 12-18 months because of supportive commodity prices, steady product spreads amid likely persisting strong steel demand," adds Chaubal who is also Moody's lead analyst on Tata Steel.
The stock ended at Rs1,454 up by Rs1.75 or 0.12% from its previous closing of Rs1,452.25 on the BSE.
Tata Steel's financial policies prioritize debt reduction over capital expenditure (capex), supported by the company's strong operating cash flows. Such credit positive initiatives accelerate debt reduction and better equip the company to tide through industry downturns.
The company's prudent financial strategy and risk management are a key component of Moody's governance risk assessment framework.
Tata Steel made a public commitment to reduce the company's gross debt by at least $1 billion every fiscal year before reinvesting surplus free cash flow generation into new initiatives. The company targets net leverage of 2x and EBITDA/interest coverage of 4x, through the cycle.
The upgrade to Ba1 reflects Tata Steel's conservative financial policies, which combined with Moody's expectations of strong operating performance throughout fiscal 2022, will contribute to further deleveraging and balance sheet strengthening. Moody's expects the company to reduce gross debt by at least a third -- or by around $5.8 billion by March 2022 from March 2020 levels. More importantly, the upgrade reflects the rating agency's expectation of moderate financial leverage and ample interest coverage for Tata Steel in a normalized steel price environment due to significant debt reduction in 2021.
Moody's expects the company to maintain a disciplined approach to liquidity, capex and shareholder returns. Prudent financial risk management has contributed to progressive reductions in financial leverage and the improved credit metrics have increased the company's cushion to withstand volatility in operations. Tata Steel's adjusted leverage declined to an estimated 2.1x at June 2021 from 6.5x at March 2020, and will wane further to 1.5x at the end of this fiscal year on the back of current positive dynamics for the steel industry. Over time, Moody's forecasts the company's leverage will track within 1.5x-2x and free cash flows to remain positive even as the annual capex reaches $1.5 billion.