Fitch Ratings has placed Mahindra Ugine Steel Company Ltd's'Fitch BBB+(ind)' National Long-Term rating on Rating Watch Evolving. A complete list of rating actions is provided at the end of this commentary.

The RWE follows the proposed demerger of MUSCO's steel business into a new subsidiary and the introduction of JV partners Sanyo Special Steel Co Ltd (Sanyo) and Mitsui & Co Ltd. (Mitsui) at the steel business, together referred to as 'transaction'. Post demerger, MUSCO will continue to operate its stamping division. Post transaction, MUSCO will have a 51% shareholding in the steel business while the rest will be held by the JV partners. The RWE will be resolved after the transaction is completed.

The RWE reflects Fitch's view that post demerger MUSCO's stamping business may be rated higher from the current rating levels whereas the demerged steel business may be rated lower. Fitch will continue to take a consolidated view of the two entities to arrive at a rating for the stamping business. A rating uplift of the stamping business would reflect its reduced potential support to the steel business, driven by an equity infusion (INR 1,870 million) into the latter by the JV partners and operational measures to turn around the steel business with the help of Sanyo. Ratings will also benefit from the stamping business's operational and legal linkages with Mahindra & Mahindra Ltd. However, the steel business will continue to constrain the stamping business's ratings due to its majority shareholding and continuing linkages under Fitch "Parent and Subsidiary Linkage Criteria". Also, debt at the stamping business level will increase over the medium term due to additional debt from the de-merger and capex plans for the business.

The steel business's ratings post demerger will reflect benefits from operational initiatives accruing over the next two-three years. An improvement in profitability will likely lead to a gradual improvement in the credit profile of the steel business over the medium term. Ratings will also reflect a strong liquidity position from the equity infusion which will help in meeting operating losses, if any, during FY13 and financial obligations over the next two years. The business will also benefit from likely support from the parent entity based on linkages.

Source - Reuters

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