Moody's upgrades JSW Steel's corporate family rating

KOLKATA: Moody's Investors Service has upgraded JSW Steel Limited's corporate family rating (CFR) and senior unsecured bond rating to Ba2 from Ba3 on hopes of improved sales driven by growing domestic demand.

"The upgrade to Ba2 reflects our expectation that JSW will continue to show improving credit metrics," Kaustubh Chaubal, vice president, Moody's said. "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." The ratings outlook is stable as it “factors in Moody's expectation that JSW will maintain a cautious approach towards evaluating capacity expansions or potential acquisitions,” it said.

Moody's expects that India's steel consumption will continue to grow in the range of 5.5%-6.5%, on the back of the government push for infrastructure projects, construction — including affordable housing — power transmission and railway investments, as well as improving demand from the automotive sector.

The global ratings agency said JSW's revenue is likely show a mid-single digit increase over the next 12-18 months, and its profitability — as measured by EBITDA margins — will stay at 20%-22%, even as raw material prices increase. "Indian steel producers are consolidating their operations, with five stressed assets — that account for an estimated 17% of the country's crude steel capacity — likely to find suitable buyers within the next 12 months," Chaubal who is also Moody's Lead Analyst for JSW, said adding :"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, the report said. “While these factors, along with a favorable pricing environment, will improve the company's earnings growth, capital expenditure on a five million tonne per annum brownfield expansion at JSW's Dolvi plant will likely lead to a prolonged negative free cash flow situation,” it added.

Looking ahead, Moody's says that 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-Rs 9,000. The impact on JSW of the US Commerce Department's imposition of a 25% tariff to curb steel imports will be limited, given the company's relatively modest exposure to the US, which constituted less than 3% of the company’s total exports for April-December 2017.

Even as India's steel consumption levels continue to rise, Moody's expects anti-dumping duties on steel imports to insulate Indian steel producers such as JSW from any plausible dumping of surplus steel. “JSW's rating reflects the company's large scale, strong market share in West and South India, and competitive conversion costs,” it added.