Moody's revises outlook on JSW Steel to negative

Moody's Investors Service today revised its outlook on JSW Steel Ltd to negative, from stable, because of sharp drop in steel prices and impact that sustained lower prices will have on the firm's credit profile.
"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," Kaustubh Chaubal, Moody's Vice President and Senior Analyst, said in a statement.
The rating action reflects sharp drop in steel prices and the resulting impact that sustained lower prices will have on JSW's credit profile, the agency said.

While JSW 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, it added.
Moody's expects the government's imposition of 20 per cent safeguard duty - effective September 14 and levied for 200 days - on certain categories of hot rolled coil steel imports to support, although modestly, prices for the rest of the financial year, 2015-16.
"Despite management's best efforts, the drop in steel prices cannot be easily offset and so, in view of reported consolidated EBITDA of Rs 94 billion (Rs 9,400 crore) in FY15, we expect EBITDA of around Rs 76 billion in FY2016," Chaubal said.

The rise in gross debt was mainly on account of increase in working capital requirements and capital expenditure. Of the Rs 403.9 billion outstanding gross debt as of September 2015, Rs 38.6 billion was on account of the company's ongoing capital expenditure towards brownfield capacity expansion from the present 14 million tonnes per annum (MTPA) to 18 MTPA.

However, 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--Rs 800/ tonne for the remainder of FY16, and then to gradually rise by 1-3 per cent in FY17," it said.

"As on September 30, JSW had cash and cash equivalents of Rs 13.8 billion, compared to short term borrowings of Rs 28 billion and Rs 30 billion of long term debt maturing within the next 12 months. The parent company has sanctioned working capital consortium limits of Rs 140 billion, renewable every year, of which Rs 65 billion is currently undrawn," it said.
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, it said.
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.