Ind-Ra downgrades JSW Steel, its NCDs; outlook negative

India Ratings and Research (Ind-Ra) today said it has downgraded JSW Steel's long-term issuer rating besides downgrading company's Rs 86.35 billion non-convertible debentures (NCDs).
"Ind-Ra has downgraded JSW Steel's long-term issuer rating to 'IND AA-' from 'IND AA'. The agency has also downgraded the company's Rs 86.35 billion NCDs to 'IND AA-' from 'IND AA'. The outlook is negative," The rating agency said in a statement.
It said, "The downgrade reflects the deterioration in JSW's consolidated net leverage to 6.5x in FY16 from 3.9x in FY15 and the decline in its funds flow from operations interest coverage to 1.8x from 2.3x during the same period."

JSW's consolidated EBITDA fell to Rs 4,957/tonne in FY16 from Rs 7,783/tonne in FY15 following a substantial decline in realisation due to import pressure and predatory pricing.
The credit metrics were also affected by the debt-led capital expenditure incurred by the company during FY15-FY16 for capacity enhancement.
Ind-Ra said the negative outlook reflects the risk of dilution in the protective measures undertaken by the government which could lead to a fall in JSW''s realisation and further deterioration of its credit profile.

The government in FY16 imposed a minimum import price (MIP) and a 20 per cent safeguard duty on steel products. Post the implementation of MIP, flat product (70 per cent of the JSW's sales) prices improved by about Rs 5,000/tonne as at end-June 2016.

Ind-Ra said it believed that better demand for steel in the domestic market and continuation of MIP will lead to a significant increase in JSW's sales volumes along with an increase in the average product realisation.
"The agency expects consolidated EBITDA to recover to the levels of Rs 7,500/ton from FY16's Rs 4,957/ton. Although this will help improve consolidated net leverage below 4.0x for FY17 and below 3.0x thereafter, the credit metrics will remain stretched in terms of leverage," it said.
JSW increased crude steel capacity by about 3.7 MT to 18 MT in FY16.
The agency however expects the company's capacity utilisation levels to come under pressure due to structural overcapacity.

"Ind-Ra expects incremental steel capacity to be 10-12 MT for FY17 compared to incremental consumption of 4-5mt in FY16," it said.
Though the import volume has substantially reduced post implementation of MIP, the domestic steel industry may remain vulnerable to imports due to a continuous decline in apparent consumption and capacity overhang in China, it said.
The Rating Agency said JSW lacks captive linkages for its key raw materials - iron ore and coking coal.