Fitch gives stable outlook for JSW Steel's proposed senior unsecured notes

Company has shown interest in three assets keeping minority stake, ring-fencing itself from their liabilities

Fitch Ratings has assigned a 'BB(EXP)' (stable outlook) expected rating to Sajjan Jindal-led JSW Steel's proposed US dollar senior unsecured notes, which the company will be using for repaying debt, capex or any other purpose in accordance with regulations. 

“The company could look to raise about $1 billion through bonds and not more,” industry source close to the development told Business Standard. “However, there is no clarity with regard to proportion of allotment for capex and debt reduction of the total amount to be raised,” said the source.

The final rating is subject to the receipt of final documentation conforming to information already received, informed Fitch in its report today. Around 60 percent of JSW's consolidated debt, including acceptances, was secured as of the first nine months of the financial year ending March 2018, resulting in a secured debt/annualised EBITDA ratio of around 2.5x. 

JSW's standalone operations contribute over 90 percent of its consolidated EBITDA. Standalone steel sales volume was up by 5 percent year-on-year in 9MFY18 and EBITDA per tonne remained healthy at around Rs 7,630 per tonne. Domestic steel prices followed the rise in international prices with a lag, improving EBITDA per tonne to Rs 9,000 per tonne in 3QFY18, from approximately Rs 6,300 per tonne in 1QFY18. The company has sustained its healthy profitability since FY17, when average EBITDA/tonne on a standalone basis jumped by around 50 percent from the FY16 low, as pressure from imports was reduced and fundamentals for the broader industry improved.

The company's plans to invest around Rs 270 billion over FY18-FY21 on several projects, including increasing steelmaking capacity expansion at its Dolvi plant by five million tonne per year by 2020 at a cost of Rs 150 billion. In addition, JSW intends to expand downstream facilities and revamp existing capacity. Projects that were announced in FY16 are proceeding as planned and are scheduled for completion in FY19. These include a pipe conveyor system for JSW's key Vijayanagar plant to cut iron-ore transportation costs, a tin plate mill and a 1.5 million tonne per year coke-oven plant. Successful completion should boost the company's sales volume and profitability.

JSW is considering acquiring assets, including those under insolvency proceedings in India. The company has shown interest in three Indian assets with the intention of keeping a minority stake and ring-fencing itself from their liabilities. It has a record of disciplined investment, which has at times meant it was not the highest bidder in competitive bids. “We believe this alleviates the risk to its leverage profile from its growth ambitions,” said Fitch. 

JSW's is India's largest steelmaker by sales volume with a dominant market share in southern and western India, where its plants are located, supported by a rising share of value-added products. Its highly efficient operations are characterised by robust yields and low labour costs, which partly offset its lack of meaningful vertical integration. The company won mining rights for five iron ore mines in Karnataka in 2016. It has started production from one mine in February 2018 and aims to produce 4.7 million tonne of iron ore, or about 20 percent of the amount needed by its Vijayanagar plant, by FY19. Captive iron-ore production would improve supply certainty for JSW and cut costs to some extent, said Fitch.

JSW, with stable outlook, can be compared with domestic peer, Tata Steel(BB/Rating--Watch Evolving), which is rated 'BB-' when excluding a one-notch uplift for potential parental support. ArcelorMittal S.A. (BB+/Positive) is rated higher than JSW as it is larger and more diversified and has lower leverage. However, notching differential is limited by ArcelorMittal's lower margin due to its global manufacturing facilities, including in locations with structurally high costs, such as Europe and the US.