Moody's revises outlook on JSW Steel to negative from stable

The ratings agency says sustained lower steel prices will have an impact on the company's credit profile

Moody's Investors Service has revised its outlook on Sajjan Jindal-led JSW Steel to negative from stable due to the sharp drop in steel prices and the resulting impact that sustained lower prices will have on the company's credit profile.

In a release, the agency said while the Mumbai-based steel producer can increase domestic sales by diverting export volumes to the Indian market and through its retail network, the severe drop in prices is already pressuring its credit metrics.

"Our change in the rating outlook to negative from stable has been prompted by the continuing deterioration in steel prices because of cheaper imports and expectations of only a modest recovery," the release quoted Kaustubh Chaubal, a Moody's vice president and senior analyst as saying.

Moody's expects the Government of India's imposition of a 20 percent safeguard duty -- effective from 14 September and levied for a period of 200 days -- on certain categories of hot rolled coil steel imports to support, although modestly, prices for the rest of FY16.

"Despite management's best efforts, the drop in steel prices cannot be easily offset and so, in view of reported consolidated EBITDA of Rs 9,400 crore in FY15, we expect EBITDA of around Rs 7,600 crore in FY2016," added Chaubal.

The rise in gross debt was mainly on account of increase in working capital requirements and capital expenditure. Of the Rs 40,400 crore outstanding gross debt as of September 2015, Rs 38,600 crore was on account of the company's ongoing capital expenditure towards brownfield capacity expansion from the present 14 million tonne to 18 million.

Moody's does not expect EBITDA per tonne to return to the levels seen in prior years. Instead, we expect it to increase by Rs 600-800 per tonne for the remainder of FY16, and then to gradually rise by 1-3 percent in FY17.

As on September 30, JSW had cash and cash equivalents of Rs 1,400 crore, compared to short term borrowings of Rs 2,800 crore and Rs 3,000 crore of long term debt maturing within the next 12 months. The parent company has sanctioned working capital consortium limits of Rs 14,000 crore, renewable every year, of which Rs 6,500 crore is currently undrawn.

JSW's weak operating performance required it to obtain waivers to prevent a potential breach of one of the leverage covenants as of September 2015, under some of its bank facilities. The company obtained the necessary waivers ahead of the covenant testing date. It has also received relaxation for future periods from some of its major lenders, and is in the process of obtaining similar relaxations on the balance.

The negative outlook reflects the pressure on leverage arising from weak steel prices and, while measures to conserve cash may well be undertaken, the decline in EBITDA is likely to outpace any reduction in debt from current levels.

The ratings could also come under pressure if the company adopts an overly aggressive acquisition or capex policy, said the ratings agency.