We view Tata Steel as “Low Risk” on the LARA scale. The company has delivered outstanding results in recent years (before the current downturn in the steel industry), with significant deleveraging and strong earnings growth. This resulted in a substantial boost to its credit profile. We view favourably the company’s track record of achieving guidance, especially in terms of deleveraging. The business’ cyclical nature is offset by Tata Steel’s commitment to paying down debt, balancing growth and deleveraging.
We like Tata Steel’s size, complete vertical integration and diversified operations. The Indian operations enjoy strong domestic demand (which supports capacity expansion), and benefit from trade protectionism (a safeguard duty). We incorporate a credit uplift on account of Tata Group’s strong reputation, which partly mitigates the highly cyclical nature of Tata Steel’s commoditised steel-making business.
Our Credit Bias on Tata Steel is “Negative”. This is due to a sharp deterioration in the operating environment, especially in Europe, driven by high energy and coking coal costs. The structural weaknesses in the European business will likely weigh on the group during downturns.
The ESG Impact on Credit is “Neutral”. The metal & mining industry is exposed to regulatory and geopolitical risks. Furthermore, the nature of the industry places Tata Steel under scrutiny from environmental agencies and investors. However, the company has managed this well by making significant efforts for environmental factors. That said, there is room for improvement in the management of water, waste and toxic materials, as well as in social aspects. While there has been some controversy (most notably in the sudden change of chairman at Tata Sons in 2016, and later at Tata Steel), this was some time ago and the new chairman has since proven himself. Thus, we see Controversies as “Immaterial”.
