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Moody's changes JSW's outlook to positive; affirms all ratings

Steel News - Published on Thu, 21 Feb 2019

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Moody's Investors Service has changed the outlook on JSW Steel Limited's ratings to positive from stable. Moody's has also affirmed JSW's Ba2 corporate family rating and the Ba2 rating on the company's senior unsecured notes. Kaustubh Chaubal, Moody's Vice President and Senior Credit Officer, said "The positive outlook reflects the improving trajectory of JSW's credit metrics principally due to its competitive and efficient production costs, solid domestic demand conditions and our expectation for a supportive ongoing price environment. The positive outlook also incorporates our expectation that the company will remain selective in any acquisitions, funding them with a prudent mix of debt and equity. We expect that any such acquisitions will be earnings accretive and help in rapid deleveraging, leading to at most only a temporary spike in adjusted debt/EBITDA leverage," adds Chaubal, who is also Moody's Lead Analyst for JSW.

JSW's CFR continues to reflect the company's large scale and strong position in its key operating markets, as well as its strong product offering with a rising share of high-margin value-added products catering to key diverse end-markets, such as the automotive and domestic construction and infrastructure sectors.

The CFR also reflects the inherent cyclicality of the steel industry and JSW's limited raw material integration, although this risk will be somewhat mitigated following the commissioning of its five iron ore mines, which once operational will meet up to 15% of its total iron ore requirements.

"JSW's use of advanced technology towards maximizing raw material efficiencies -- such as blending varied grades of coking coal in manufacturing coke and its beneficiation plant to convert lower grade iron ore into higher grade variants -- underpins its competitive conversion costs and high profitability," says Chaubal.

Moody's expects India's steel consumption to grow at around 5.5%-6.0% annually over the next one to two years, supported by the country's strong domestic demand, in turn propelled by the government of India's (Baa2 stable) spending on infrastructure projects and good prospects in the automotive industry. At the same time, consolidation in India's steel sector and limited new capacity commissioning over the 18-24 months will keep industry utilization levels in check and help pricing discipline.

In Moody's view, India's rising steel demand, JSW's wide slate of long and flat products, and its increasing proportion of value-added products will help preserve its market share, currently around 15.6% by steel volumes.

JSW's cost of production is among the lowest when compared with other leading Asian steel companies, and supports EBITDA and EBITA margins of 22% and 26% respectively. The company's EBITDA/ton has consistently improved over the last year and remained above INR12,000, the highest level in 10 years.

Moody's expects JSW's adjusted debt/EBITDA at March 2019 to remain flat to March 2018 level of 2.6x. Based on sustainable EBITDA/ton of INR9,500, Moody's estimates the company's leverage will reach around 2.8x-3.2x in the fiscal year ending March 2020, comfortably below its upgrade trigger for a Ba1 CFR.

Large capital expenditure of about INR150 billion annually will keep JSW's free cash flow generation negative for the next two to three years, which it plans to fund through long-term debt.

Moody's expects JSW to successfully refinance its maiden $500 bond falling due in November 2019 (2019 notes) in a timely manner. The 2019 notes constitute only 8% of the company's total debt. If the company fails to refinance this maturity at least six months ahead of the scheduled maturity, this will pressure the rating.

Moody's would consider upgrading the ratings if the company maintains adjusted debt/EBITDA less than 3.5x and EBIT/interest in excess of 3.0x.

A downgrade of the ratings is unlikely in the near term, given the positive ratings outlook. Nevertheless, a sharp shift in industry conditions that triggers declining sales volumes and dents pricing and profitability would pressure the ratings. Specific metrics indicative of downward rating pressure include adjusted debt/EBITDA in excess of 4.0x, EBIT/interest coverage below 2.0x and EBIT margins below 12%.

Downward rating pressure could also build if the company undertakes a large debt-financed acquisition without an immediate and meaningful counterbalancing effect on earnings, thus resulting in a sustained increase in leverage. Execution risks related to the timely and seamless integration of the acquired business could also pressure the ratings.

The principal methodology used in these ratings was Steel Industry published in September 2017. Please see the Rating Methodologies page on for a copy of this methodology.

JSW Steel Limited is a leading manufacturer of a wide range of steel products in India. It has an installed steelmaking capacity of 18 million tonnes per annum, and is one of India's largest steel producers.

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Posted By : Rabi Wangkhem on Thu, 21 Feb 2019
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