Fitch revises outlook on JSW Steel to negative from stable

Fitch Ratings has revised the outlook on JSW Steel's (JSWS) long-term issuer default rating (IDR) to negative from stable and affirmed the IDR at BB.

The agency has also affirmed JSWS's senior unsecured rating at BB. The revision of outlook reflects the risks in JSWS's ability to deleverage and generate positive free cash flow (FCF) because of the various challenges in the Indian market.

"Apart from weak industry conditions, JSWS's deleveraging and improvement in its FCF profile can be delayed by an increase in its planned capex or inability to stabilise and improve performance at acquired assets," said Fitch.

A deleveraging trajectory that is slower than our expectations and prolonged negative FCF will indicate a weaker financial profile and affect JSWS's ratings.

"We estimate JSWS's total gross debt and EBITDA leverage including acceptances a long-term customer advance and potential outflows for acquisition of assets under insolvency proceedings in India, will increase to above five times in the financial year ending March 2020 (FY20), which is above the four times threshold where we would consider negative rating action," it said.

"We also expect JSWS's FCF to be negative until FY22 before turning positive. We expect margins to improve and volumes to expand from FY21, driven by better industry-wide spreads and a pick-up in domestic steel demand in addition to higher contribution from subsidiaries. This should enable JSW's leverage to be in line with its rating," Fitch added.

JSWS's earnings before interest, tax, depreciation and amortisation (EBITDA) for its standalone operations in India, which comprise almost all of consolidated earnings, were down around 40 per cent year-on-year in 9M FY20, excluding tax incentives relating to earlier years.

The EBITDA decline was mainly driven by weaker steel prices and margins, as EBITDA per tonne fell to around Rs 7,500 (9M FY19: Rs 12,300). Sales volumes were also marginally lower by 1 per cent at 11.4 million tonnes.

Weak sales volumes reflected tepid steel demand in India due to factors such as a slowdown in disbursals for public-sector projects, tighter liquidity conditions for the private sector and weak auto-sector sales.

"We expect a higher margin for JSWS in FY21 based on normalising raw material costs and stabilising steel prices. Indian steel demand should also pick up, driven by government spending on infrastructure and better overall economic growth, supporting healthy volume growth for JSWS," said Fitch.

However, weak global steel demand and any increase in exports to India, possibly due to the impact on the global economy if COVID-19 prevails for a prolonged period, present risks, it added.