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Tata’s Europe JV split marginal credit negative

Robust Indian business profit


Robust Indian business profit


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Tata Steel Ltd. (BB-/Positive/–) and Thyssenkrupp AG’s decision to cease efforts on their proposed Europe joint venture is marginally credit negative for the Indian group, said S&P Global Ratings on 13 May 2019.

“Tata Steel’s Europe business, with marginal free cash flow and €2.5 billion of external debt that was hitherto deconsolidated from fiscal year 2020 (ending March 2020), will now remain a part of our consolidated estimates,” said S&P.

This is likely to depress the ratio of funds from operations (FFO) to debt by about 100 basis points across our forecast horizon.

The cancellation of the joint venture will also leave Tata Steel exposed to the weaker and more volatile performance of the European operations until the company identifies an alternative strategy to deconsolidate the European operations.

“Sustained high steel prices and continued robust profitability of Tata Steel’s India business remain the more important factors for our positive rating outlook on the company,” it said.

“We expect supportive steel prices and continued high utilization in the India business to drive Tata Steel’s FFO-to-debt sustainably above 15% over the next six to 12 months.

“This is notwithstanding the drag from the retention of the Europe business and the lower-than-expected fourth-quarter profitability in 2019,” said the rating agency.

“Any outsized spending by Tata Steel on new acquisitions would be a risk to our estimates, although we view this risk to be low, given that there are no large steel mills left to be auctioned in Indian bankruptcy courts,” it said.

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