Tata Steel's cost rationalisation in European operations credit positive: Moody's

Moody's Investors Service on Monday said that the cost rationalization of Tata Steel's European operations is credit positive as it will support a turnaround in the private steel major's wholly-owned arm TSUKH's less profitable operations. On November 18, Tata Steel outlined a program to reduce costs and improve product mix at its European operations, which are held by wholly-owned subsidiary Tata Steel UK Holdings (TSUKH), Moody's Investors Service said in a statement.

"The planned cost rationalization program is credit positive for both companies because it will support a turnaround in TSUKH's less profitable operations that have dragged on Tata Steel's consolidated credit quality," the statement said. The European operations accounted for 35 percent of Tata Steel's total shipments in the first half of FY20, but they generated only around 2.4 percent of its reported consolidated earnings before interest, tax, depreciation, and amortization (EBITDA).

Although the program is credit positive and a continuation of the company's efforts to turnaround the European operations, a timely and meaningful improvement in performance is key, the credit rating agency said. Sustained weakness in demand from Europe's steel-consuming sectors, global economic slowdown and increasing trade barriers cast downside risks to the pace of credit profile improvement.

Tata Steel's Indian operations are the cornerstone of the company's strong profitability because these operations are integrated into the production of key raw materials in steelmaking, which combats the country's slowing steel demand and declining end-product prices. Sluggish economic growth with weak demand from automobile, manufacturing, property, and construction industries have diminished steel demand in India and caused a decline in end-product prices in the first half.

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