The keen interest of JSW Steel in acquiring distressed steel assets may see the company raise more debt, increasing its leverage and the possibility of a ratings downgrade.
According to credit ratings agency Fitch, Indian steel companies are looking to increase their investments for organic growth, in addition to investing in potential acquisitions of distressed assets in the country. “This could result in JSW’s leverage remaining relatively high based on our rating sensitivities, prompting a ratings downgrade. Therefore, we have a negative outlook on the company,” analysts at Fitch observed.
JSW Steel’s consolidated net debt stood at Rs 42,764 crore for the three-month period ended September 30, down Rs 559 crore on a sequential basis. The finance cost stood at `950 crore during the quarter, which was flat compared with Rs 945 crore in Q1FY18. JSW’s free cash flows (FCF) are expected to be neutral over the next year, factoring in its guidance for capital expenditure. Analysts expect JSW to rely mainly on refinancing to address its debt maturities. “We believe steady sector fundamentals and access to diverse funding sources in India and abroad would allow the company to manage its liquidity needs adequately.”
However, Tata Steel could show positive FCF as it may take time to ramp up its capital spending since the company has not yet given details on its plan to double capacity in India in the next five years, Fitch said. Overall, the rating agency has forecast a steel demand growth of around 5% in 2018, driven mainly by a sustained increase in government infrastructure spending, as the 2019 general election draws near.
Indian finished steel demand grew 4.5% in April-November 2017, allowing domestic output to rise 5% despite a rebound in imports. Private consumption is also expected to show a healthy growth with improved monsoon rains, adjustment to the new GST regime and overall acceleration in economic activity. As for prices, global steel prices are currently higher than the level at which India’s anti-dumping duties come into effect. Hot rolled coil prices in China are around $600/tonne, compared with the duty level of $489/tonne.
Meanwhile, steel imports into India jumped 48% in July-September 2017, curbing rise in domestic steel prices and sales volume. According to Fitch, global steel prices will decrease in 2018, but with lower input costs, steelmakers’ profitability will be largely intact. In that case, imports into India could moderate and not present a material risk to domestic margins.