In a positive turn of events for Tata Steel, Fitch Ratings announced an upgrade to the company's issuer default rating (IDR). The credit rating agency also upgraded the notes of Tata Steel's investment arm, ABJA Investment. This decision comes in light of the reduced financial risk associated with Tata Steel's UK operations, which are presently transitioning to a more cost-effective and environmentally friendly electric arc furnace (EAF)-based steelmaking process.
Tata Steel, a prominent player in the Metals & Mining industry according to InvestingPro Tips, is making strides in its industry with this shift towards EAF-based steelmaking. This transition is expected to significantly restructure the workforce and improve Tata Steel's UK cost base by GBP 150-170 per tonne, particularly amidst volatile steel prices. The transition is further bolstered by funding from the UK government.
The company's activities in India also play a significant role in its strong financial position. Tata Steel's cost position in India is reinforced by raw material sufficiency and low-cost assets like the Kalinganagar and Jamshedpur plants. In fact, Tata Steel has ambitious plans to double its Indian capacity by 2030. Sales volumes are projected to rise in FY24 due to increased output from operations like Neelachal Ispat Nigam and the Kalinganagar expansion.
Fitch Ratings anticipates a decline in EBITDA leverage to 2.5 times by FY26, providing further testament to Tata Steel's strong financial outlook.
It has elevated Tata Steel's IDR to 'BBB-' from 'BB+', attributing this move to reduced financial risk from its UK operations and potential backing by the Tata Group. The company's standalone credit profile (SCP) also advanced to 'bb+' from 'bb'. This strategic move towards greener, cost-efficient EAF-based steelmaking was noted as a key factor in improving cost competitiveness for Tata Steel's UK division.
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