Moody's upgrades JSW Steel bond rating to Ba2

Moody's Investors Service has upgraded JSW Steel's corporate family rating (CFR) and senior unsecured bond rating to Ba2 from Ba3. Last week, Fitch Ratings also revised its outlook on JSW Steel to 'stable' from 'negative'. The Ba2 CFR reflects the company's large scale, strong market shares in west and south India, and competitive conversion costs, with the last factor supported by JSW's wide range of furnace technology and the coastal locations of its operations, Moody's said. The strengths are counter balanced by the cyclical nature of the steel industry and JSW's lack of raw material integration.

Both factors increase supply and price risks, it said in a statement. These risks are partly mitigated by JSW's recent addition of five iron-ore mining licenses, even though when fully operational, these mines will cater to less than 15 per cent of the company's total iron ore requirement, it added. "The upgrade to Ba2 reflects our expectation that JSW will continue to show improving credit metrics," said Kaustubh Chaubal, a Moody's VP and senior analyst. JSW's likely better results will be due to the benign operating environment, and higher steel sales from the company's brownfield expansion, catering to India's growing steel demand, he said. Moody's expects that India's steel consumption will continue to grow in the range of 5.5-6.5 per cent on the back of government's push for infrastructure projects, construction including affordable housing power transmission and railway investments as also improving demand from the automotive sector. "Indian steel producers are consolidating their operations, with five stressed assets - that account for an estimated 17 per cent of the country's crude steel capacity likely to find suitable buyers within the next 12 months," said Chaubal, who is also Moody's Lead Analyst for JSW. He said such a situation augurs well for large established players such as JSW. Rising domestic demand, a wide slate of long and flat products, and an increasing proportion of value-added products will help JSW in preserving its market share in India, Moody's said. These factors, along with a favourable pricing environment, will improve the company's earnings growth, but capital expenditure to develop a five MTPA brownfield expansion at JSW's Dolvi plant will likely lead to a prolonged negative free cash flow situation, it said. Looking ahead, JSW's product mix demonstrates a higher proportion of value-added products versus its steel manufacturing peers in India, which should preserve EBITDA/tonne at Rs 8,500-9,000, it added.

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