The company’s free cash flows have been coming down over the last two years from Rs 4,258 crore in FY18 to Rs 770 crore in FY19 and moving to negative trajectory in FY20 (Rs -4,032 crore), Bloomberg data shows.
A negative free cash flow of Rs 4,032 crore at the end of financial year 2019-2020 and continuing capital expenditure will mean JSW Steel’s debt will remain elevated. The company also does not have plans to reduce its debt this year, a senior management official told FE.
The company’s free cash flows have been coming down over the last two years from Rs 4,258 crore in FY18 to Rs 770 crore in FY19 and moving to negative trajectory in FY20 (Rs -4,032 crore), Bloomberg data shows. Meanwhile, the company’s net debt has increased from Rs 38,500 crore in FY18 to Rs 46,000 crore in FY19, and Rs 53,500 crore at the end of FY20.
Ratings firm Moody’s Investors Service recently placed JSW Steel’s Ba2 corporate family rating (CFR) and the Ba2 senior unsecured rating under review for downgrade. The ratings outlook was revised from stable to “ratings under review”. Kaustubh Chaubal, lead analyst for JSW said, “The review for downgrade reflects our expectation that weak steel demand will strain JSW’s credit profile, at least through the fiscal year ending March 2021”. He added, “In fact, there is a distinct possibility JSW will remain in breach of our downgrade triggers for its Ba2 CFR.”
However, Seshagiri Rao, joint managing director and group chief financial officer at JSW Steel, told FE that the company is confident of delivering on its guidance in terms of production, sales and costs. Moreover, the company has no plans to reduce debt this year as it is in the midst of expansion. “We are a company which is in the midst of expansion and we have to complete those projects. We are working on not increasing the debt and we are aiming at maintaining it at the current levels. However, reduction may not be possible in this year,” Rao said.
To be sure, through an enabling resolution, the company’s board has given approval to raise Rs 7,000 crore through long-term resources via issuance of non-convertible debentures.
Rao said that the Moody’s expectation is that as demand is falling, JSW Steel’s production numbers, volume-wise, will come down. “We are not seeing that happening as per the guidance of numbers that we have given,” he said.
Last year JSW Steel produced 16.06 million tonne (mt) and has given a guidance of 16 million tonne of production in FY21. Last year, the company sold 14.9 mt of steel and has given a guidance of 15 mt this year. “We are not reducing our numbers it will be at the same level to a little higher,” Rao said.
According to analysts, JSW Steel has spent 50% of its Rs 49,000-crore expansion capex during FY2018-2020. “Despite earnings pressure, it has little choice but to complete Dolvi 5 MTPA (million tonne per annum) expansion and other cost saving projects. JSW Steel’s Rs 9,000-crore capex guidance for FY2021E would help complete the Dolvi expansion, 1 MTPA CRM (cold rolling) mill, 8 MTPA pellet plant and 1 MTPA wire rod mill,” analysts at Kotak Institutional Equities said in a recent report.
The company’s consolidated net debt to equity stood at 1.48x at the end of FY20, which is higher compared to 1.39x in FY18 and 1.20x in FY19, according to data sourced from Bloomberg. The company’s net debt to Ebitda (earnings before interest, tax depreciation and amortisation) at 4.50x is also higher compared to 2.59x in FY18 and 2.18x in FY19.
JSW Steel reported a weak set of numbers for the recently-ended March quarter. JSW Steel’s net profit declined a sharp 87% year-on-year to Rs 188 crore for the fourth quarter ended March 31, 2020, due to an exceptional item of Rs 805 crore. Revenue from operations of the company decreased by 20% y-o-y to Rs 17,887 crore. Ebitda fell 32% y-o-y to Rs 2,975 crore, while the Ebitda margin declined 320 basis points on a y-o-y basis to 16.6%.