Lenders' concerns on Jindal Steel

Rising debt and finance cost; firm plans to sell assets to cut debt but it has to move faster, say analysts

The financial metrics, including debt coverage ratios and the market value, of Jindal Steel and Power (JSPL) has declined sharply in the past six months, worrying its bankers and mutual fund (MF) lenders.

CRISIL, ICRA and CARE, three leading rating agencies,- have red-flagged the deterioration, downgrading its debt last month. In 2014-15, consolidated debt rose to Rs 45,500 crore even as it made a loss of Rs 1,278 crore. Unsecured loans were Rs 10,601 crore, with exposure mainly from leading MFs. Since January this year, the market capitalisation of the company is down by 56 per cent to Rs 6,335 crore as on Monday from Rs 13,900 crore as on January this year.

In the June quarter of this financial year, JSPL reported a profit before interest, depreciation and tax of Rs 710 crore and a net loss of Rs 268 crore, on operating income of Rs 3,134 crore.

A majority of its earnings were spent on repaying its loans. It finance cost shot up 60 per cent in FY15 to Rs 2,874 crore, from Rs 1,806 crore in FY14.

“All the financial metrics, including debt leverage ratios and debt downgrades, are worrying for short-term lenders like MFs and the company will have to take immediate steps to improve these,” warned a top official of a rating agency.

While downgrading the debt, ICRA said the revision was due to deterioration in JSPL’s credit metrics, led by lower sales realisation in the steel business, weaker operating profitability and cash flow, at a time when its debt was at an elevated level. “With the continuing challenging environment for the steel sector, cash flow from operations for JSPL are expected to remain subdued in the medium term. This would result in higher dependence on debt refinancing or raising funds through alternative routes like sale of non-core assets and divestment of stake in some subsidiaries,” ICRA said in August.

On September 11, CRISIL also downgraded JSPL, saying the ratio of consolidated debt to earnings before interest, tax, depreciation and amortisation would be higher than the earlier expected one of around five times, as on end-March 2016. “This is mainly because of weak profitability due to sharp fall in steel realisations. The profitability in the power business will be constrained by power evacuation issues and lower plant load factors. CRISIL believes the group's consolidated debt to Ebitda (operating earnings) ratio will remain at around seven times as on March 31, 2016, and will now take longer than earlier expected to correct,” it said.

On September 22, CARE Ratings said its downgrade was due to a change in the company’s financial risk profile. This was characterised by lower than envisaged sales and a fall in profitability margins and gross cash accrual during FY15 and the first quarter of FY16, largely due to a sharp fall in realisation. “The ratings also factor in higher than anticipated moderation in JSPL’s capital structure, as well as its debt coverage indicators and the continued challenging environment in the steel industry,” it said.

 

Jindal’s problems started last September, when the Supreme Court cancelled all coal block allotments to all companies. Slowing of the economy, with a fall in commodity prices worldwide, added to JSPL’s problems. The downgrades have made MF lenders and banks worried over their investments. A top official of a leading bank said they were closely monitoring the company. “But as of now, JSPL loans are standard but signs of financial stress are there,” an IDBI Bank official said last week.

When asked, a company spokesperson said they were confident of meeting its commitment on debt servicing and repayment, with higher internal cash generation, smarter working capital management and sale of non-core assets.

On the rating downgrades, the company blamed the general macro environment in the industry. “It is pertinent to note the continuing challenges being faced by the steel industry –- the slowdown in demand, increased capacity in the domestic market and steep price drops due to dumping by low-cost producers like China. This has resulted in an unfavorable scenario being cast over the key players, especially those who have enhanced capacities recently (like us) by taking loans from banks and financial institutions,” it said.

“Our incremental Enitda and some asset sales will help pare the debt to more comfortable levels. The recent cut in (the Reserve Bank's) repo rate (and banks' resulting cut in lending rates) will further reduce our interest burden," the spokesperson said.