Moody's downgrades JSW Steel to Ba3, outlook negative

Ratings agency does not expect EBITDA per tonne to return to levels seen earlier

Ratings agency Moody's has downgraded JSW Steel by two notches reflecting weaker-than-expected operating performance due to persistently low steel prices and expectations that weakness in steel price environment will continue over the next 12 to 18 months.

The agency remains concerned about persistence of downward pressure on steel prices with the continuation of imports into India from China, Korea and Japan.

Such imports -- on a volume basis -- were up 30% for April-December from the same period last year, despite the implementation of protectionist measures against imports.

While JSW Steel has undertaken several measures to reduce costs, conserve cash flow, and minimize the rise in debt, the severe drop in steel prices has strained earnings and increased leverage, said the agency in its report.

"In particular, today's downgrade reflects the higher-than-expected deterioration in JSW's interest cover metrics and increasing leverage, as evidenced by EBIT/interest coverage of less than 1x and debt/EBITDA of 6.8x for the 12 months ended December 2015," the report quoted Kaustubh Chaubal, vice president and senior analyst as saying.

Looking ahead, we expect an increase in the company's shipments with commencement of the incremental 4 million tonne brownfield expansions and the continued growth of retail sales through the expansion of its "Shoppe" outlets -- both benefiting from relatively strong domestic demand. As a result, we estimate leverage to improve in FY2017, although it will still be weakly positioned for the rating, said the report.

Moody's does not expect EBITDA per tonne to return to levels seen in prior years.

Rather, Moody's notes that the roll-over of safeguard duties beyond March 2016 and the maintenance of at least current prices are necessary if domestic steel companies are to record any improvement in their EBITDA per tonne.

JSW's balance sheet liquidity position remains weak with cash and cash equivalents of Rs 11.61 billion at December 2015 against a higher amount of short term debt and maturities over the next 12 months. While the company has access to undrawn short-term lines of some Rs 60 billion, these facilities are renewable and re-evaluated each year, based on the company's estimated working capital requirements.

Furthermore, JSW Steel's weak operating performance required it to obtain waivers on bank credit facilities in respect of its leverage covenants for the September 2015 testing date.

The company has been proactive in managing this risk and has also received relaxations for future periods from some of its major lenders, and is in the process of obtaining similar relaxations on the balance for the next covenant testing date in March 2016.

The negative outlook reflects the potential for industry conditions to weaken further and the company proving unable to improve its operating and financial performance over the next 12 to 18 months.

In particular, the negative outlook incorporates our assessment that while the company may well take measures to conserve cash, the increase in EBITDA following commencement of the brownfield expansions may not, in isolation, be sufficient to materially reduce leverage from current levels.

Given today's multi-notch ratings downgrade and the negative outlook, and the company's weak credit metrics, a ratings upgrade is not expected over the medium term, said Moody's.