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Rating Action:

Moody's confirms JSW's Ba2 ratings; outlook negative

09 Jul 2020

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 debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating 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 by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com 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

No Related Data.
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