During the early trading session on Tuesday, Tata Steel shares surged by 2.47% to reach ₹130.55 per share, coming close to their 52-week high of ₹135. This increase in stock value came after global rating agency Moody's Investors Service upgraded Tata Steel to investment grade with a 'Baa3' long-term issuer rating and changed the outlook to 'stable' from 'positive'. The rating agency has also withdrawn the company's 'Ba1' corporate family rating.
"The upgrade reflects our expectation of continued strength in Tata Steel's credit profile due to the company's solid market position in India. We expect the company's profitability to increase even as softer steel prices dent revenues," says Kaustubh Chaubal, Moody's Senior Vice President.
The stable rating outlook reflects Tata Steel's strengthening credit metrics, that Moody's believes can be sustained even as the company invests in building new capacity in India and Europe.
The stable outlook also reflects the rating agency's view that Tata Steel will maintain its prudent discipline in capital allocation and financial policies and operate with credit metrics appropriate for its Baa3 rating.
In terms of liquidity, Moody's said Tata Steel's liquidity position is good, benefiting from its $2.3 billion in cash and liquid investments as of the end of June 2023 and $2.25 billion in undrawn term loan (long-term) and working capital credit lines in India (364-day facilities) and Europe (multi-year revolving credit facility maturing in March 2026).
These liquidity sources, combined with Moody's expectation for cash flow from operations, will be sufficient to fund the company's capital spending, working capital needs, scheduled debt maturities, and dividend payments over the next 15 months until September 2024.
Meanwhile, brokerage firm Axis Securities has upgraded its rating on Tata Steel's stock from 'hold' to 'buy' in its latest note and also raised the target price to ₹145 per share from an earlier target of ₹125. These revisions by the brokerage came after the removal of the overhang of the UK business restructuring.
"Tata Steel has finally struck a deal with the UK government to provide support for the green steel transition at its UK-based Port Talbot facility. The upstream (3.5 MT blast furnace and coke oven facilities) in the UK are coming near the end of their life," said Axis Securities.
"Tata Steel will transition to a 3.0 MT electric arc furnace (EAF) replacing the old 3.5 MT blast furnace (BF), wherein the UK government has agreed to grant £500 million for the transition, while Tata Steel will infuse the remaining £750 million (from internal equity) of the total Capex of £1.25 billion required for the EAF steelmaking," the brokerage added.
Prabhudas Lilladher, another brokerage firm, has also initiated coverage on Tata Steel with a 'buy' rating and a target price of ₹137 per share. It believes that Tata Steel is well-positioned to benefit from strong volume growth in the domestic steel market. The brokerage anticipates robust earnings growth in the coming years, driven by the potential for double-digit volume growth after the commissioning of the 5 million-ton KPO II by Q1 FY25.
Additionally, Tata Steel's commitment to deleverage its balance sheet while maintaining planned capital expenditures strengthens its financial position. Falling coking coal prices and a tight global steel market further enhance the prospects for Tata Steel Europe, it added.
28 analysts polled by MintGenie on average have a 'hold' call on the stock.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie. We advise investors to check with certified experts before taking any investment decisions.
