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Singapore, June 27, 2022 -- Moody's Investors Service has upgraded JSW Steel Limited's corporate family rating (CFR) to Ba1 from Ba2. Moody's has also upgraded to Ba1 from Ba2 JSW's senior unsecured notes rating, the guaranteed backed senior unsecured rating on Periama Holdings LLC, and the US$40 million guaranteed senior unsecured revenue bonds issued by Jefferson County Port Authority.
At the same time, Moody's has changed the ratings outlook on JSW Steel Limited and Periama Holdings LLC to stable from positive.
"The upgrade reflects JSW's continued strong operating performance and consistently strong credit metrics while maintaining good liquidity," says Kaustubh Chaubal a Moody's Senior Vice President.
In Moody's view, JSW's substantially stronger operating performance will help to sustain its deleveraging. The company's Moody's-adjusted leverage, as measured by consolidated adjusted debt/EBITDA, will remain comfortably below the upgrade trigger of 3.0x (for a Ba1 CFR), having already declined to 4.3x at March 2021 from 5.9x at March 2020, and more recently to an estimated 2.2x at March 2022.
The upgrade also reflects the successful commissioning of the company's 5 million tonnes per annum (mtpa) brownfield expansion at Dolvi in November 2021 and its ramp up thereafter, which will translate into at least a 20% increase in steel shipments during the current fiscal year.
JSW's Ba1 CFR reflects the company's use of latest furnace technology; increasing focus on value-added products; improving backward integration into iron ore, the key steelmaking input; cost competitive operations; and high profitability. In fact, the company's financial profile substantially improved during fiscal 2022 to levels stronger than its Ba1 CFR. Even so, its key credit metrics will revert to levels that are more commensurate with the Ba1 rating once steel prices and metal spreads return toward normalized levels.
Moody's notes that market conditions will gradually moderate over the next 12-18 months. Rising global interest rates to curb inflation and an increase in Indian steel export taxes will slightly dampen steel prices.
Moody's estimates Indian steelmakers exported around 13.5 metric tons (mt) of finished steel during the fiscal year ended March 2022 (fiscal 2022). A portion of the exports will likely be diverted to the domestic market in fiscal 2023, owing to export taxes. Still, underlying steel demand in India, JSW's main operating market, remains robust, especially with the government's continued infrastructure investments. Moody's expects steel consumption growth in India to slightly moderate to the high-single-digit-percentage during fiscal 2023, following an increase to 11% in fiscal 2022. JSW should benefit from strong domestic demand prospects, given its status as a leading steelmaker in the country.
Moody's forecasts are based on the rating agency's current price sensitivities for steel ($830 per ton for JSW's Indian operations) for fiscal 2023. As for key steelmaking inputs, the agency has modeled per ton of metallurgical coal at $308 and iron ore at about $100. For fiscal 2024, Moody's forecasts are based on the mid-point of its price sensitivity ranges ($600-$800/ton for steel, $80-$125 for iron ore and $110-$180 for metallurgical coal).
Given that JSW's backward integration into iron ore production is only about 50% and that the royalties on the self-mined iron ore is in excess of 100% of the iron ore price, Moody's remains cautious and its forecasts are based on JSW's 15-year average EBITDA/ton of $160. These assumptions translate into a 35% decline in profitability over fiscal 2022.
Meanwhile, the increase in steel shipments to 22.6 million tonnes during fiscal 2023, up from 19.1 mt in the previous fiscal year, will limit any EBITDA decline in the rating agency's forecasts to just about a quarter.
Moody's projects JSW will incur an estimated $2.5 billion in annual capital expenditure toward investments in downstream facilities, plant upgrades and brownfield capacity, causing free cash flow to turn negative. Even so, with its EBIT margin in the 15%-18% range, leverage below 3.0x and EBIT/interest coverage above 4.0x, the company's credit metrics will stay sufficiently strong for its Ba1 CFR.
JSW's balance-sheet liquidity is good.
The company had cash and cash equivalents of about $2.5 billion as of 31 March 2022, undrawn term loans and letters of credit aggregating $1.4 billion, and is expected to generate an estimated $4 billion in operating cash flow over the 18 months till September 2023. These cash sources should be more than sufficient to meet the company's capital expenditure, debt repayments (including short-term debt) and dividends, which total about $7.0 billion over the same period.
Given the inherently volatile cycles of the steel industry, some unevenness in intra-year working capital is likely, which could lead the company to continue relying on its undrawn $750 million fund and non-fund based short-term 364-day working capital facilities.
Moody's views the global steel sector as having high environmental risk, particularly regarding carbon transition risk, waste and pollution. Steel companies such as JSW operate blast furnaces that are more exposed to carbon transition risk than electric arc furnace (EAF) producers, although the latter have high electricity requirements. The industry's transition to EAF will be slow and require new capital investment, as well as sufficient scrap supply.
The stable outlook reflects Moody's view that JSW will remain prudent in its capital allocation and maintain its good liquidity position.
JSW currently exhibits an extremely strong financial profile for its rating. Although softening steel prices and narrowing product spreads will cause financial metrics to somewhat moderate, Moody's anticipates that such levels should remain in line with the rating agency's requirements for the company's Ba1 CFR.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
JSW's ratings are currently appropriately positioned at Ba1.
Whereas JSW's significantly improved operating performance in fiscal 2022 resulted in credit metrics that are substantially stronger for its Ba1 ratings, Moody's notes that it is unlikely that the company would sustain these metrics when steel prices and product spreads return to normal levels and supply and demand balances out. Moreover, the execution risks associated with the company's large capital expenditure, to the tune of an annual spend of some $2.5 billion over the next two years, will likely constrain a transition to investment grade.
Nevertheless, over a longer period, upward ratings pressure could build if JSW operates with its EBIT margin above 15% and consolidated leverage below 2.5x, while generating positive free cash flow; all sustained through the cycle. Conservative financial policies with a very good liquidity position, and a prudent mix of debt and equity-funded capital spending would be prerequisites for an upgrade.
Any deterioration in its liquidity position, such that the company has insufficient cash sources to fund its operations, capital expenditure and upcoming debt maturities over at least the next 18 months, a material reduction in liquid assets including cash, or reduced access to bank and debt markets, could exert negative ratings pressure. Downward rating momentum could also build if JSW undertakes any large debt-financed acquisitions without an immediate and meaningful counterbalancing effect on its earnings, causing its leverage to climb.
Key financial metrics indicative of a lower rating include leverage above 3.5x and EBIT/interest coverage below 3.5x, through the cycle. A deterioration in volumes and margins in the company's key operating markets that affect its ability to generate positive free cash flow, or a declining flexibility for capital spending and dividend reduction could also pressure the rating.
The principal methodology used in these ratings was Steel published in November 2021 and available at https://ratings.moodys.com/api/rmc-documents/356428 . Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.
JSW Steel Limited is one of India's largest steel producers with an installed steelmaking capacity of 25.5 million tonnes per annum (mtpa). Its international operations comprise (1) 1.2 million net tonnes per annum (mntpa) plate mills and 0.5 mntpa pipe mills in Texas; (2) a 3.0 mntpa hot rolling mill and a 1.5 mntpa electric arc furnace in Ohio; and (3) a 1.3 mtpa long steel rolling facility in Piombino, Italy.
JSW generated consolidated revenues of US$19.7 billion and consolidated EBITDA of US$5.5 billion during fiscal 2022.
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found on https://ratings.moodys.com/rating-definitions .
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Kaustubh Chaubal Senior Vice President Corporate Finance Group Moody's Investors Service Singapore Pte. Ltd. 71 Robinson Road #05-01/02 Singapore, 068895 Singapore JOURNALISTS: 852 3758 1350 Client Service: 852 3551 3077
Vikas Halan Associate Managing Director Corporate Finance Group JOURNALISTS: 852 3758 1350 Client Service: 852 3551 3077
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