Fitch Ratings has downgraded Sajjan Jindal-led JSW Steel reflecting the decline in profitability and rise in leverage during a prolonged period of weak international steel prices, coupled with debt-funded investment in capacity expansion. The agency has also mantained a negative outlook for the company.
"We expect JSW Steel's leverage to moderate, given that higher capacity is now on stream, and our assumption of a gradual improvement in average selling price (ASP) from financial year 2017 following government measures to support domestic prices. However, there are still risks to ASPs from a premature lifting of regulatory protection and to financial profiles should the company embark on another phase of debt-funded expansion," said the agency in its report.
Fitch's forecast assumes that further price hikes will be constrained in the near term, given the heightened competition among domestic producers to support utilisation rates. However, should the government remove the protectionist policies ahead of any significant improvement in the global steel market, this would derail the company's ability to deleverage to a level consistent.
JSW Steel has minimal vertical integration for both iron ore and coking coal. This results in higher costs compared with some of its peers, because it needs to purchase these raw materials. However, the company's low conversion costs have mitigated the impact to a large extent. In the current scenario, JSW Steel has in fact benefited from the fall in raw material prices compared with integrated players. Lack of domestic mining leases has also insulated the company from political and legal risks related to license cancellation.