Credit rating agency Ind-Ra (India Ratings and Research) has downgraded Tata Steel’s outlook to ‘negative’ from ‘stable’. Ind-Ra’s has affirmed Tata Steel’s Long-Term Issuer Rating at ‘IND AA’
Ind-Ra has downgraded Tata Steel’s outlook based on the risk of deterioration of the company’s credit profile due to the COVID-19 lockdown. The agency believes an extended lockdown will impact steel consumption of end-user segments, including automobile and construction, and the resultant lower demand environment will strain Tata Steel’s credit portfolio beyond FY2021.
Automobile, infrastructure, engineering and realty segments have been significantly impacted by the lockdown. Ind-Ra expects a gradual recovery in these sectors by the second half of FY2021, when government spending increases and household incomes improve.
India Ratings reaffirmed the company’s ability to respond to the situation. Tata Steel has a strong liquidity position and is well-equipped to cope with the challenging quarters of 2020, said the agency. Tata Steel’s profit margins in the near term will be impacted by a fall in metal prices and a drop in capacity utilisations. Gross margins are also expected to be impacted by increased competition to reduce build-up inventory. Given the expected fall in demand, lower production volumes could also hurt Tata Steel’s fixed costs per unit.
Ind-Ra speculates a sharper correction in metal prices compared to raw material prices (imported coking coal), however, an expected fall in iron ore prices could support the steelmaker’s gross margins.
Tata Steel is an India-based steelmaker with a presence in Europe and Asia. The company had scaled down its India operations given the challenges in moving goods and manpower during the lockdown and low steel demand due to a slump in auto sales, as reported by Davis Index.