Fitch Ratings has assigned India-based JSW Steel a Long-Term Foreign Currency Issuer Default Rating (IDR) of 'BB+'. The Outlook is Stable. The agency has also assigned JSW Steel a senior unsecured rating of 'BB+' and the company's proposed US dollar denominated notes an expected rating of 'BB+(EXP)'.
KEY RATING DRIVERS
Robust Profitability: JSW Steel benefits from its low cost base due to its low conversion costs (costs to convert raw materials to finished products). The company's efficient operations are reflected in its strong profitability, with EBITDA margin of 17.9% in the financial year ended 31 March 2014 (FY14) and 17% in FY13. Fitch expects JSW Steel's profitability to remain strong over the medium term because it will continue initiatives to reduce costs, with a focus on the Dolvi unit that was acquired when JSW ISPAT Limited merged with JSW Steel in June 2013.
The increasing share of value-added products in JSW Steel's revenue (29% as of 1QFY15) enhances its profitability. The company benefits from its association with JFE Steel Corporation (15% shareholder in JSW Steel), which provides access to technology to produce high value-added products. Fitch expects JSW Steel's profitability to improve as value-added products' share of revenue increases.
Strong Market Position: JSW Steel is the second-largest steel producer in India, with plants located in southern and western India, which drive its dominant market share in those regions. In addition JSW Steel's steel exports (26% of FY14 revenue) provide some diversity of end markets.
Financial Profile to Improve: Fitch expects JSW Steel's financial profile to improve over the near to medium term, supported by higher production volumes following expanded capacity and better profitability. The agency expects the JSW Steel's FFO-adjusted net leverage to fall to 3.5x by FY16.
JSW Steel's current financial profile is aggressive with FFO-adjusted net leverage of 4x in FY14 (FY13: 3.3x) and FFO interest cover of 3.6x (FY13: 3.9x). This is mainly driven by high debt levels following its merger with JSW ISPAT and capex for expanding capacity to 18 million tonnes per annum (mtpa) (FY14: 14.3mtpa) and improving its product profile. The large capex has resulted in negative free cash flows (FCF) over the last five years.
Absence of Vertical Linkages: JSW Steel has minimal vertical integration for its key raw materials - iron ore and coking coal. This results in higher costs of purchasing these raw materials for JSW Steel compared with some its steel peers. However, Fitch notes that the company's low conversion costs have mitigated this to a large extent. JSW Steel has also diversified its raw material sourcing to minimise the impact on operations from supply disruptions. This followed the challenges in sourcing iron ore during the last two years when iron ore mining was suspended in various states in India.
Sound Long-Term Industry Fundamentals: Fitch expects steel demand in India to increase in the next 12 months as investment in India picks up. Steel prices slid and squeezed the margins of steel producers over 2012-2013, when slower economic growth hurt demand from the key automobile, construction and engineering sectors.
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