Singapore, July 09, 2020 -- Moody's Investors Service, ( " Moody's " ) has confirmed
JSW Steel Limited's Ba2 corporate family rating (CFR) and Ba2 senior
unsecured debt rating.
The outlook has been changed to negative from ratings under review.
This concludes the review process initiated on 14 April 2020.
RATINGS RATIONALE
"The rating confirmation recognizes that while JSW's credit
profile will deteriorate reflecting the challenges brought by the pandemic,
we believe that the company's financial metrics will likely recover
to levels commensurate with the current ratings by the fiscal year ending
March 2023 (fiscal 2023)," says Kaustubh Chaubal, a
Moody's Vice President and Senior Credit Officer.
"However, JSW's leverage and coverage will remain weak
until that time, and the negative outlook indicates the risk of
a downgrade if the steel industry does not recover as we currently expect
or if there is a slower-than-anticipated recovery in the
company's financial metrics," adds Chaubal.
Moody's expects JSW's leverage, as measured by adjusted
debt/adjusted EBITDA, will increase to an estimated 6.4x
by the end of fiscal 2021, up from 6.0x a year earlier,
and stay in breach of the 4.5x downgrade trigger for the company's
Ba2 CFR. However, JSW should be able to restore its metrics
to appropriate levels by fiscal 2023, considering its relatively
strong business profile, brand strength and technological capabilities,
which will help the company sustain above-average profitability.
"While the deterioration in demand caused by the pandemic will cause
JSW's EBIT margin to decline to single digits for the first time
in 14 years, the company's profitability at 8% will
still be at the higher end of its Ba rating range," says Chaubal,
who is also Moody's Lead Analyst for JSW.
Moody's expects steel consumption in India (Baa3 negative),
JSW's key operating market, to contract by at least 15%
through fiscal 2021 because of weak automotive and manufacturing demand,
even as infrastructure investments rise. India's economic
growth will also remain materially lower than in the past with real GDP
shrinking 3.0%.
A contracting steel market in India will hurt JSW, but this is partially
mitigated by the company's market position and brand strength.
Moody's further expects JSW will deploy any steel surpluses towards
exports. The company's export shipments surged in Q1 of fiscal
2021 when domestic demand was soft. Key export destinations included
South East Asia, Southern Europe, the Middle East and China.
The confirmation of the ratings also reflects JSW's inherently strong
operating profile, with credit metrics supportive of a higher rating
prior to the pandemic. The outlook on the company's ratings
was positive until March 2020, when it was changed to stable in
anticipation of a slow recovery in credit metrics.
The rapid and widening spread of the coronavirus outbreak, deteriorating
global economic outlook, falling oil prices and asset price declines
are creating a severe and extensive credit shock across many sectors,
regions and markets. The combined credit effects of these developments
are unprecedented. The steel sector has been one of the sectors
most significantly affected by the shock, given its sensitivity
to consumer demand and sentiment.
More specifically, the weaknesses in JSW's credit profile,
including its exposure to steel demand for manufacturing and volatile
material costs, have left it vulnerable to shifts in market sentiment
in the current unprecedented operating conditions, and it remains
vulnerable to further disruptions caused by the ongoing pandemic.
Moody's regards the coronavirus outbreak as a social risk under
its environmental, social and governance (ESG) framework,
given the substantial implications for public health and safety.
Today's action reflects the impact of the breadth and severity of
the shock on JSW, and the broad deterioration in credit quality
it has triggered.
JSW's Ba2 CFR continues to reflect the company's large scale and
strong position in its key markets; competitive conversion costs,
resulting from its efficient operations and use of the latest furnace
technology; and good product and end-market diversification,
with an increasing focus on value-added products and retail sales.
RATIONALE FOR THE NEGATIVE OUTLOOK
The negative outlook reflects Moody's view that tougher economic
conditions in JSW's key markets will likely stay for an extended
period and that there are significant downside risks from the pandemic,
which could cause a delay in the company's recovery. The
outlook also incorporates Moody's expectation that JSW's credit
profile will remain weak for a prolonged period, with no meaningful
recovery anticipated at least over the next 18-24 months.
LIQUIDITY
Moody's assesses JSW's liquidity as weak based on its assessment
of the company's cash needs for the period April 2020 through September
2021.
JSW held cash equivalent to $1.6 billion as of March 2020.
This along with a $133 million-equivalent INR bond issuance
in Q1 fiscal 2021, undrawn term loans to the tune of $730
million and cash flow from operations aggregating $1.4 billion
in the 18-month period ending in September 2021 will be insufficient
to meet the company's capital expenditure and debt repayments (including
short-term debt), which total $4.5 billion,
over the same period.
Additionally, while cash flow from operations aids in reducing the
deficit, JSW may need to continue relying on short-term 364-day
working capital facilities to tide over temporary mismatches caused by
working capital volatility within the year. JSW also continues
to have strong access to the domestic capital markets, and has long-standing
relations with Indian and multinational banks.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
An upgrade of the ratings is unlikely in the near term, as it will
likely be difficult for JSW to improve its credit metrics to pre-pandemic
levels, given the current environment and the company's stretched
credit metrics. However, the outlook could return to stable
if improved market conditions lead to an improving trajectory in its metrics.
Specifically, Moody's could change the outlook to stable if
leverage declines to 4.5x and EBIT/interest coverage rises to 2.0x.
Today's rating action incorporates Moody's expectation that JSW
will continue to implement measures to restore its financial profile and
strengthen liquidity. As such, any departure from this expectation
would immediately pressure the Ba2 ratings.
Moody's could downgrade JSW's CFR if its leverage remains above 4.5x,
or EBIT/interest coverage below 2.0x, or its EBIT margin
below 12%, all on a sustained basis and Moody's does
not see evidence of improvement in fiscal 2022. Downward rating
pressure could also build if JSW undertakes a large debt-financed
acquisition without an immediate and meaningful counterbalancing effect
on earnings, thereby resulting in a sustained increase in leverage.
Execution risks related to the timely and seamless integration of a potential
acquisition could also pressure the ratings.
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Steel Industry published
in September 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1074524.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
JSW Steel Limited is one of the largest producers of steel products in
India, with an installed steelmaking capacity of 18 million tons
per annum (mtpa). Its international operations comprise (1) 1.2
million net tonnes plates and pipes mills in Texas; (2) a 3.0
mtpa hot rolling mill and a 1.5 mtpa electric arc furnace in Ohio;
and (3) a 1.32 mtpa long steel rolling facility in Piombino,
Italy.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and
sensitivity analysis, see the sections Methodology Assumptions and
Sensitivity to Assumptions in the disclosure form. Moody's
Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of
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same series, category/class of debt, security or pursuant
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to rated entity, Disclosure from rated entity.
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Regulatory disclosures contained in this press release apply to the credit
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review.
Moody's general principles for assessing environmental, social
and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
At least one ESG consideration was material to the credit rating action(s)
announced and described above.
The Global Scale Credit Rating on this Credit Rating Announcement was
issued by one of Moody's affiliates outside the EU and is endorsed
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am Main 60322, Germany, in accordance with Art.4 paragraph
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for additional regulatory disclosures for each credit rating.
Kaustubh Chaubal
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
Ian Lewis
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
Releasing Office:
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
