Fitch Downgrades Tata Steel’s Outlook to Negative Amid UK Operational Concerns

Fitch Ratings adjusts Tata Steel Limited's (TSL) outlook to Negative, citing challenges in UK operations and a significant drop in overall performance. Despite a projected EBITDA rise, delays in transitioning to cost-efficient technologies pose risks. Positive prospects in India could balance the financial landscape.

Fitch Ratings has revised the Outlook on Tata Steel Limited's (TSL) Issuer Default Rating (IDR) from Stable to Negative while affirming the rating at 'BBB-'. This adjustment underscores concerns over the company's ability to turn around its UK operations amid ongoing challenges, potentially hindering financial recovery.

The revision comes as inflation in 12 out of 22 states in India exceeds the national average, highlighting regional economic disparities. Tata Steel's UK operations have significantly dragged on its performance, worsened by a major loss in Europe and an extended maintenance shutdown at its Netherlands facility. These issues have resulted in a near 30 per cent drop in EBITDA for FY24.

Fitch forecasts TSL's EBITDA leverage to improve to 2.9x by March 2025, down from 4.0x in FY24, though this remains close to the 3.0x threshold that could prompt further negative rating actions.

The agency expects FY25 EBITDA to rise by about 50 per cent to Rs 311 billion, driven by robust Indian operations and improved profitability in the Netherlands. A major challenge is the uncertainty surrounding the transition at UK facilities to cost-efficient electric arc furnace technology.

Delays in this transition could lead to sustained EBITDA losses, hampering turnaround plans. Despite these challenges, Fitch is optimistic about TSL's Indian operations, projecting benefits from significant raw material self-sufficiency and low production costs at Jamshedpur and Kalinganagar plants.

These plants rank among the lowest-cost steel producers globally, giving TSL a competitive edge in a volatile market. Fitch anticipates TSL's sales volumes to grow by 5 per cent in FY25, driven by additional capacity at the Kalinganagar plant.

The company's capital expenditure is expected to remain flat at Rs 182 billion in FY25, with increases projected in subsequent years. However, negative free cash flow is expected due to continued investments in capacity expansion and UK restructuring costs.

TSL's credit profile benefits from strategic support by the Tata Group, which holds a 33 per cent stake in the company. This relationship provides a one-notch uplift to TSL's IDR, reflecting the group's vested interest in TSL's stability and growth. (ANI)

(With inputs from agencies.)