Will JSPL be able to resurrect its fortunes?

Asset monetisation and debt rescheduling will be the deciding factors

Mounting pressure in its core steel and power businesses and high debt accumulated to fund expansions have resulted in regular downgrades of Jindal Steel and Power (JSPL)’s credit ratings, raising doubts over its ability to pay interest and loans. JSPL has been trying to reduce debt through sale of its non-core assets, but against expectations of monetisation of assets by end-March, rating agencies now feel it will not be possible in the specified time period and have further downgraded the company’s credit rating.

On March 9, CRISIL further downgraded the long-term and short-term debt (worth Rs 32,000 crore) ratings, as it believes the  group's liquidity will deteriorate significantly in the near term, as stake sale in the rolling mill and receipt of proceeds from the settlement in Bolivia might take longer. Delays would adversely impact the group's near-term debt servicing ability and increase its reliance on timely refinancing of debt taken for the Angul (Odisha) steel plant.

While some big payments are due post April 2016, there are also worries over the possibility of foreign lenders recalling loans worth $550 million, all of which the street will be keeping an eye on given the deterioration in JSPL’s financials.

With expansions underway, JSPL’s debt-equity ratio increased from 0.95x to 1.88x, whereas interest coverage ratio fell from 8.45 times to 1.12 times between FY12 and FY15. Steep fall in steel realisations, weak power demand and merchant tariffs and a lack of sufficient captive coal availability have been major concerns of late. Consequently, JSPL’s operating profit of Rs 646 crore in the December 2015 quarter was not enough to meet interest costs of Rs 806 crore, leading to a net loss. The good news is that steel prices have rebounded in the March 2016 quarter, which should improve JSPL’s operating performance. While Ravi Uppal, JSPL’s managing director, remains confident of a recovery in subsequent quarters, success in refinancing debt and sale of assets is crucial for a turnaround.

With 6.75 million tonnes per annum of steel capacity and 5,100 Mw of power generation capacity, JSPL is looking at monetising 3,400 Mw of power capacities and getting a joint venture partner for steel business. JSPL is also talking to bankers to reschedule payments.  Experts like Sandeep Upadhyay, managing director at Centrum Infrastructure Advisory, however, feel fluidity in coal supplies and power purchase agreement off-takes are adding to the challenges for the sector.  

Nevertheless, if the company succeeds in monetising assets, it will lift investor confidence in the stock, which has gained 15 per cent from its lows on the Budget day to Rs 62.80 a share, led by higher global steel prices and imposition of minimum import duty by the government in steel imports.