Positive performance by Tata Steel during the first quarter of 2017-18 is on expected lines and profitability will be sustained in the current fiscal, S&P Global Ratings said on Wednesday.
"The healthy profitability at India-based Tata Steel Ltd (BB-/stable) is in line with our expectations and supports the company's credit quality," S&P Global Ratings said in a statement.
A rating of BB points to less vulnerability of default.
The agency has put down the sustained profitability to stronger global steel prices.
"We expect Tata Steel's profitability in India and Europe to sustain for the rest of fiscal 2018, barring seasonal variations and despite potentially lower demand in India. The progress in restructuring Tata Steel's European operations and the company's new capital expenditure decisions will drive its consolidated financial health and our ratings," it said.
Although the GST effect and seasonally soft steel prices may compress Ebitda further in the quarter to September 2017, the agency said it expects margins to strengthen in third and fourth quarters of 2017-18.
Its European operations have improved over the last 4-6 quarters after the sale of its specialty steel and long product divisions - both unprofitable units.
The second half of the calendar year is seasonally weaker for European operations due to summer holidays and winter shutdowns, the rating agency said. It added: "We expect the company's European operations to generate average Ebitda per tonne of about $60 for fiscal 2018 and beyond." The agency also said it expected Tata Steel's ratio of funds from operations (FFO) to debt to improve to 12-13 per cent.
"These ratios support our stable outlook on the ratings on Tata Steel. We would raise our rating if the FFO-to-debt ratio nears 15 per cent sustainably," S&P added.
Tata Steel sold its stake in Tata Motors for about Rs 38 billion, boosting its liquidity during the quarter, it said.
"We expect the company to use the proceeds for the settlement payment of about 550 million pounds for Tata Steel's British pension plan as part of an overall restructuring exercise under way for its European operations," the agency noted.
Tata Steel maintains an option to invest in the next phase of brownfield expansion at Kalinganagar, which it said "could increase capital expenditure although we believe that is unlikely over fiscal 2018 and 2019".
The company's credit quality hinges on the outcome of completion of strategic measures such as European asset restructuring, pension plan overhaul and JVs, along with its future capital expenditure plans, the agency said.