Moody's changes JSW Steel's outlook to stable, affirms Ba2 ratings

Moody's changes outlook on JSW Steel's ratings to stable from positive, affirms Ba2 ratings

Moody's Investors Service has changed the outlook on JSW Steel Ltd's ratings to stable from positive.

At the same time, Moody's has affirmed the company's Ba2 corporate family rating and the Ba2 rating on the company's senior unsecured dollar notes.

"The change in outlook to stable reflects JSW's weaker than expected operating performance, and our expectation that it will take longer for the company's credit metrics to improve to levels that warrant a higher rating," said Moody's Vice President and Senior Credit Officer Kaustubh Chaubal.

Steel consumption growth slowed to about 3.5 per cent for the nine months ended December 2019 from 7.5 per cent growth for the fiscal year ending March 2019.

The slowdown was driven by sluggish economic activity, which has weakened demand from steel-using industries such as manufacturing and automotive, and by slow government disbursements towards infrastructure projects.

Moody's expects a slight pickup in steel demand in fiscal 2021, along with a higher proportion of finished steel products with the commissioning of JSW's cold rolling mill facility, and concerted backward integration efforts into increasing the production of its key input, iron ore.

These efforts will support profitability at levels appropriate for the company's Ba2 rating.

"The change in outlook to stable also reflects our expectation that JSW will soon complete the acquisition of a minority stake in Bhushan Power and Steel Ltd (BPSL) from the distressed company's lenders which will raise some execution risk," added Chaubal.

JSW has been identified as the highest bidder for BPSL. While final deal details are not known, Moody's expects the acquisition cost to be around 2.7 billion dollars and JSW's cash outflow is expected to be limited to 600 million dollars.

The Ba2 ratings reflect JSW's large scale and strong position in its key operating markets, competitive conversion costs, good product and end-market diversification, and increasing focus on value-added products and retail markets.

The ratings also incorporate JSW's exposure to the inherently cyclical steel industry, its relatively limited raw material integration and risks associated with the execution of the BPSL acquisition, said Moody's.