Fitch sees risks to JSW Steel’s ability to deleverage, generate positive free cash flow

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Published: March 27, 2020 1:00:06 AM

Domestic steel prices are currently trading at a discount of 7% to landed cost from China and at a discount of 3% to landed cost from Japan.

JSW Steel’s revenue fell about 11% to Rs 18,055 crore in the October-December period versus Rs 20,320 crore in third quarter of FY19.

Fitch Ratings on Thursday said that it saw risks to JSW Steel’s ability to deleverage and generate positive free cash flow (FCF) from weak industry conditions, an increase in its planned capex, or inability to stabilise and improve performance at acquired assets. According to the rating firm’s estimates, total gross debt to Ebitda would remain above 4x until FY21 and FCF negative until FY22, before improving.

Fitch could downgrade the company’s ratings if its total debt to Ebitda leverage is not lower than 4x by FY22 and if negative FCF extends beyond FY22. However, the outlook maybe revised to stable if performance is better than the sensitivities for negative rating action. According to Bloomberg data, the company’s gross debt as on December 31, 2019, stood at Rs 43,397 crore, down from Rs 47,396 crore as on March 31, 2019. The company’s net debt was at Rs 33,075 crore versus net debt of Rs 41,269 at the end of FY19.

“We estimate leverage will fall below 4x in FY22 and FCF will turn positive from FY23. However, we also see meaningful risks in the form of weak industry conditions, an increase in planned capex, or delays in stabilisation and improvement of performance at acquired assets,” it said in a note.

JSW Steel’s revenue fell about 11% to Rs 18,055 crore in the October-December period versus Rs 20,320 crore in third quarter of FY19. Management attributed the fall in revenue to the demand slowdown that was carried over from September and October months of 2019, Standard Chartered said in a recent report.

Analysts also believe that increasing the number of confirmed Covid-19 cases have the potential to halt rally seen in the domestic steel prices since November 2019. After touching a low of Rs 32,250 per million tonne in the first week of November 2019, domestic hot-rolled coil (HRC) prices have been on the rise and are ruling at around Rs 37,000/MT, implying an increase of 15% in the last three months, according to a note from ICRA in early March.

Domestic steel prices are currently trading at a discount of 7% to landed cost from China and at a discount of 3% to landed cost from Japan. Jayanta Roy, group head (corporate sector ratings), ICRA, estimates that the domestic steel consumption growth will remain between 4% to 5% in FY2021, as against the November 2019 forecast of 6.5%. “Rising number of confirmed cases of coronavirus in India remains a concern, and the same along with continuing macroeconomic headwinds, could affect domestic steel consumption and pressurise steel prices in the coming months,” he said.

On the demand front, concerns seem to be deepening in the region as domestic consumption in February 2020 declined 3% year-on-year; exports declined 8% y-o-y to 570,000 tonnes — lowest level since July 2019. “Thus far, imports have been fairly benign — down 31% y-o-y at mere 401kt—the lowest level since January 2011 as logistics were impacted pursuant to the Coronavirus scare,” analysts at Edelweiss said.

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