Fitch Revises Tata Steel's Outlook to Negative Amid UK Operations Woes

Fitch Ratings downgraded Tata Steel's outlook from stable to negative while affirming its 'BBB-' rating, citing challenges in UK operations. Although a significant recovery is forecasted for FY25, uncertainties related to production shifts and investment costs pose risks to financial stability.

Fitch Ratings has downgraded the Outlook on Tata Steel Limited's (TSL) Issuer Default Rating (IDR) from Stable to Negative but upheld the rating at 'BBB-', citing concerns over the company's ability to turn around its struggling UK operations.

Tata Steel's performance has been significantly impacted by losses in Europe, including a prolonged maintenance shutdown at its Netherlands facility, leading to a 30 per cent drop in EBITDA for FY24. Fitch projects EBITDA leverage to improve to 2.9x by March 2025 (FY25) from 4.0x in FY24.

However, the improvement comes close to the 3.0x threshold that could trigger negative rating actions. An expected 50 per cent rise in FY25 EBITDA to Rs 311 billion is seen, driven by strong growth in Indian operations and better profitability in the Netherlands.

The transition of UK operations to electric arc furnace technology remains uncertain and may cause sustained EBITDA losses if delayed. Despite this, TSL's Indian operations are expected to benefit from low production costs and raw material self-sufficiency.

Sales volumes are forecast to grow by 5 per cent in FY25, bolstered by added capacity at Kalinganagar. The company plans a flat capital expenditure of Rs 182 billion for FY25, with an increase anticipated in later years.

However, ongoing investments and restructuring costs are expected to lead to negative free cash flow. TSL's credit profile is bolstered by strategic support from the Tata Group, which holds a 33 per cent stake, providing stability and growth potential.

(With inputs from agencies.)