Moody's puts JSW Steel's rating on review for downgrade over Covid-19 shock

Agency says weaknesses in JSW's credit profile, such as its exposure to weakening steel demand for manufacturing and volatile material costs, have left it vulnerable to shifts in market sentiment

Rating agency Moody's has placed JSW Steel Ltd's corporate family rating “Ba2” under review for downgrade, as the steel sector has been significantly affected by the Covid-19 outbreak.

The deteriorating global economic outlook, falling oil prices, and asset price declines are creating a severe and extensive credit shock across sectors, regions and markets, Moody’s said in a statement today.

The weaknesses in JSW's credit profile, such as its exposure to weakening steel demand for manufacturing and volatile material costs, have left it vulnerable to shifts in market sentiment in these unprecedented operating conditions.

Even prior to the coronavirus outbreak, sluggish economic growth, weak demand and narrow product spreads had led to a deterioration in JSW's credit profile, Moody’s said.

Moody's regards the coronavirus outbreak as a social risk under its ESG framework, given the substantial implications on public health and safety.

The rating action reflects the breadth and severity of the impact on JSW, and the deterioration in credit quality it has triggered.

In March, JSW said that following the nationwide lockdown and the various advisories, production at most of its plants had either been scaled down or suspended.

"The review for downgrade reflects the expectation that weak steel demand will strain JSW's credit profile, at least through the fiscal year ending March 2021," said Moody's Vice President and Senior Credit Officer Kaustubh Chaubal.

"In fact, there is a distinct possibility JSW will remain in breach of our downgrade triggers for its Ba2 CFR," Moody’s added.

Moody's review will focus on the impact of the outbreak on JSW's operations in the light of increasing restrictions on people's movement and the potential for a further shutdown of operations to ensure employee safety. The review will also look at the impact the outbreak has on demand, steel prices and product spreads.

The rating agency would conduct an analysis of JSW's asset base, cost structure, likely cash burn rate and liquidity, as well as management's strategy for coping with prolonged, low and volatile commodity prices, it added.

Profitability, measured in terms of Ebitda per tonne, for company’s domestic steel operations declined by 30 per cent during the nine months ended December 2019 to Rs 8,168 from Rs 11,677 in fiscal 2019.

"The review reflects our concern that JSW will face significant challenges due to the coronavirus-led economic downturn, with declining sales, weak earnings and free cash flow generation because of tepid demand from automakers, manufacturing and other steel consuming industries," Chaubal added.

Moody's expects to conclude the review within 90 days.

Given the current market situation, an upgrade of JSW's ratings is unlikely in the near term. However, the outlook could return to stable if improved market conditions lead to a recovery in metrics to pre-outbreak levels.