Rating assigned JSW STEEL LIMITED Instruments Amount (Rs. crore) Ratings 1 Remarks Commercial Paper issue 1,500.00 CARE A1+ (A One Plus) Assigned JSWSL has proposed to raise up to Rs.1,500 crore through a Commercial Paper (CP) issue shortly. The proceeds of the CP issue are proposed to be utilized for the working capital requirement and general corporate purpose. The CP issue would have a tenure of up to one year. Rating Rationale The rating derives strength from JSWSL s significant presence in the Indian steel sector, its experienced management with wellestablished track record in brownfield project execution and cost management expertise, well-diversified product mix with increasing share of value added and upstream products, improvement in operational performance during FY13 (refers to the period from April 1, 2012 to March 31, 2013) and Q1FY14 (refers to the period from April 1, 2013 to June 30, 2013) as well as improving availability of iron ore in Karnataka, though, at a slow pace. The rating also factors in susceptibility of profit margins to volatility in input cost due to lack of raw material integration, residual commitments towards various projects undertaken by the company, moderation in capital structure, exposure to foreign exchange risk and inherent cyclicality of the steel industry. JSWSL s ability to complete the ongoing projects within the envisaged time and cost enhancing the level of backward integration for cost effective production as well as further improvement in iron ore supply are the key rating sensitivities. Background JSWSL is part of the JSW group, which in turn is part of the O.P. Jindal group. The group has presence across various sectors, such as steel, energy, minerals, ports and infrastructure, cement, etc. With the recent merger of JSW Ispat Steel Limited (JSIL) with JSWSL, the overall steelmaking capacity of the company stands at 14.30 million tonnes per annum (mtpa), which is at present the largest in terms of rated capacity in India. Integrated manufacturing units located across three states (i.e., Karnataka, Maharashtra and Tamil Nadu) have facilities to produce a wide range of flat and long steel products. Key developments Scheme of amalgamation and arrangement The composite scheme of amalgamation and arrangement amongst JSWSL, JISL, JSW Building Systems Ltd (JBSL) and JSW Steel Coated Products Ltd (JSCPL) has become effective from June 01, 2013, with the appointed date of July 01, 2012. Consequently, Kalmeshwar unit of JISL as well as Vasind and Tarapur units of JSWSL in Maharashtra were transferred to JSCPL. Further, JBSL and residual JISL (Dolvi steel complex) were amalgamated with JSWSL. Karnataka iron ore update In April 2013, the Supreme Court allowed resumption of mining operations of all mines in category A and 63 mines in category B subject to the terms and conditions as stipulated by Central Empowered Committee (CEC). CEC has approved Reclamation & Rehabilitation (R&R) plan for 29 mines in category A (permitted capacity ~8 mtpa) and 28 mines in category B (permitted capacity ~8 mtpa). 11 mines in category A and 3 mines in category B with a combined capacity of over 6 mtpa have resumed mining operations. More mines are expected to get into production in short to medium term. National Mineral Development Corporation (NMDC) is currently operating at around 9 mtpa production rate. Credit Risk Assessment JSWSL s significant presence in the Indian steel sector JSWSL, with its enhanced steelmaking capacity of 14.30 mtpa, has considerable presence in the steel industry in India. Its multilocation steel manufacturing facilities produce various upstream products ranging from Mild Steel (MS) slabs/billets and Hot 1 Complete definition of the ratings assigned are available at www.careratings.com and in other CARE publications 1
Rolled (HR) coils/steel plates/sheets, bar and wire rod products to the downstream products like cold rolled coils/sheets, colour coated coils/sheets and galvanized coils/sheets. The company also has a foreign collaboration agreement with JFE Steel Corp (Japan) for licensing of the high grade automotive steel technology which will be used to manufacture value added steel products. The company also has mining assets overseas in Chile, USA and Mozambique. Experienced management JSWSL is amongst fastest growing steel companies in India. Over the past years, JSWSL and various group companies have ramped up their capacities in a timely and cost-effective manner. Furthermore, the company managed to maintain competitive margins (despite lack of raw material integration) due to its efficient operations. The company has shown strong track record in brownfield project execution as well as cost management expertise. Well-diversified product mix JSWSL earns its revenues from a diversified mix of steel products. During FY13, the share of flat rolled product to the total sales volume increased to 60% from 55% in FY12 (refers to the period from April 1, 2011 to March 31, 2012), while that of long rolled products remained flat at 19%. Due to continuous emphasis on increasing value addition, contribution from semis has come down substantially over past few years and stood at 3% in FY13 (5% in FY12). Value-added products accounted for 18% of total sales volume in FY13. Improvement in operational performance During FY13, JSWSL achieved highest crude steel production of 8.52 million tonnes (15% y-o-y growth). Vijayanagar steel complex (10 mtpa capacity) was operating at around 80% capacity utilization level during FY13. This was on the back of several initiatives undertaken by the company, such as higher capability to use low grade iron ore due to commissioning of 20 mtpa beneficiation plant; augmented in-bound and out-bound logistics infrastructure to enhance flexibility in utilization of inputs and dispatch of finished goods; commissioned fourth stove of Blast Furnace III and phase 2 of Hot Strip Mill (HSM). This led to 11% y-o-y growth in JSWSL s total income while PBILDT witnessed 15% y-o-y growth in FY13. The PBILDT margin improved from 16.04% in FY12 to 16.71% in FY13. This was in spite of softening average realization as well as higher price of iron ore procured through e-auctions. The company was able to achieve this due to better cost management by optimizing blend of coal for coke making, improved fuel efficiency, reduction in the price of coal, increased waste heat utilization across plants and productivity improvements. During Q1FY14, JSWSL sustained its operating profitability in spite of giving effect of the merger of Dolvi steel complex of JISL having lower operating profitability (largely due to lower level of integration). The operating profitability of Dolvi steel complex is expected to improve from FY15 onwards with completion of the ongoing backward integration projects (viz., 1 mtpa coke oven and 4 mtpa pellet plant). Availability of iron ore improving but at a slow pace Even with the Supreme Court allowing mines in A and B categories restart operations in Karnataka, iron ore remains in short supply as it takes time for the mining output to bounce back. Several mines are yet to get R&R plan approved by CEC and are in the process of getting their mining lease renewed. Currently operating A and B category mines are producing over 6 million tonnes, while NMDC is expected to produce at the rate of around 9 mtpa. Additional 5 million tonnes of sub-grade iron ore is expected to be e-auctioned. JSWSL will have to procure the balance iron ore requirement from nearby states in order to achieve its crude steel production target of 12 million tonnes for the current financial year. Approval by the court for cancellation of Category C mines and allotting/assigning them through transparent bidding process to end users is expected to ease availability of iron ore in Karnataka. Lack of captive raw material resources Since the company relies on open market purchases for its key raw materials, i.e iron ore and coal, the company s profit margins are susceptible to volatility in the raw material prices. The volatility in input prices has adversely impacted JSWSL s PBILDT margins over the past three years which the company has been able to mitigate to some extent through its various cost reduction and productivity improvement measures. The company has one of the lowest conversion cost in the industry owing to operational efficiencies. Also, JSWSL is self-sufficient with regard to its power requirement through captive power plants, thereby reducing its power cost. Moderation in capital structure and debt coverage indicators JSWSL s total debt (including Bills Discounted and creditors backed by Acceptances) stood at Rs.28,150 crore as on March 31, 2013 (up from Rs.26,648 crore as on March 31, 2012). Overall gearing remained moderate at 1.22x as at end-fy13 (1.26x as at end-fy12). The gearing levels JSWSL have remained at this level largely on account of debt-funded investment in expansion of 2
steelmaking capacities and higher working capital requirements due to increased volumes. The capital structure is expected to deteriorate moderately owing to transfer to JISL s debt to JSWSL upon the amalgamation. Total Debt/GCA ratio was moderate at 6.82x in FY13 (6.14x in FY12). Interest coverage dipped to 3.45x in FY13 (4.36x in FY12) in line with increase in interest expense due to commissioning of the projects. Commitment towards ongoing projects At Vijayanagar works, major ongoing projects include 2.3 mtpa Cold Rolling Mill (CRM) complex and balancing equipment for achieving full utilization of rolling capacity at 10 mtpa capacity including de-bottlenecking/setting up new facilities. Total investment in the above projects is planned at Rs.8,679 crore, out of which the company has incurred Rs.4,321 crore (50% of total cost) till June 30, 2013. The projects are to be completed in phases during FY14 and FY15. In addition, JSWSL (through a wholly owned subsidiary) is setting up 1.0 mtpa coke oven and 4.0 mtpa pellet plant as part of backward integration plan at Dolvi steel complex. The total planned investment in the projects is Rs.1,875 crore. Till June 30, 2013, the company has incurred Rs.1,314 crore (70% of total cost). Project execution risk With the capital-intensive projects in progress, JSWSL is exposed to project execution risk as well as stabilization risk of newly commissioned capacities. However, in the past, JSWSL has successfully completed the projects and stabilized the operations of the new capacities ramped-up in a phased manner, including the 3.2 mtpa capacity expansion program (taking the steelmaking capacity to 11 mtpa). Thus, the project execution risk is mitigated to large extent. Exposure to foreign exchange risk During FY13, JSWSL s imports of raw materials amounted to Rs.12,080 crore (forming 53% of raw materials consumed), which was largely on account of imports of coal/coke. JSWSL earned Rs.7,597 crore through exports (around 20% of total revenue) during the same period, therefore, the company was a net importer. In addition, the company had foreign currency borrowings of around Rs.6,665 crore (around USD 1.23 billion) with a current portion of Rs.528 crore as on March 31, 2013. Un-hedged Acceptances stood at Rs.6,200 crore (around USD 1.14 billion) as on March 31, 2013. Hence, the company is exposed to foreign exchange fluctuation risk for the un-hedged portion of the currency exposure. JSWSL registered exceptional foreign exchange loss (net) of Rs.367 crore in FY13 (Rs.821 crore in FY12) and exchange loss of Rs.853 crore in Q1FY14. However, the company has a natural hedge to a large extent against the currency exposure as the domestic steel prices generally follow the international steel prices. Cyclicality of the steel industry Prospects of steel industry are strongly co-related to economic cycles. Demand for steel is sensitive to trends of particular industries, viz. automotive, construction, infrastructure and consumer durables, which are the key consumers of steel products. These key user industries in turn depend on various macroeconomic factors, such as consumer confidence, employment rates, interest rates and inflation rates, etc. in the economies in which they sell their products. When downturns occur in these economies or sectors, steel industry may witness decline in demand. Prospects The demand growth from the key consumer sectors (i.e., consumer durable, automobile, construction and infrastructure) is foreseen as muted in the short term as concerns over economic slowdown are expected to prevail for a while. However, a good monsoon is expected to drive consumption in the second part of FY14, which in turn, would support revival of steel demand growth. With the enhanced steel-making capacity and benefits accruing from continuing efforts towards increasing level of integration and reducing conversion costs, JWSL is expected to benefit from the pickup in demand. Going forward, JSWSL s revenue growth is expected to be largely volume driven. While the company s ability to improve its profitability will depend on uninterrupted supply of iron ore, movement in input prices and timely implementation of backward integration projects. 3
Financial Performance (Rs. Crore) For the period ended / as at Mar.31, 2011 2012 2013 (12m, A) (12m, A) (12m, A) Working Results Net Sales 23,060 32,028 35,325 Total Operating income 23,474 32,188 35,571 PBILDT 5,011 5,163 5,944 Interest 851 1,184 1,722 Depreciation 1,379 1,708 1,974 PBT 2,769 2,097 2,507 PAT (after deferred tax) 2,011 1,626 1,801 Gross Cash Accruals 3,777 4,342 4,129 Financial Position Equity Capital 284 284 284 Networth 19,251 21,212 23,074 Total capital employed 34,116 40,557 44,309 Key Ratios Growth Growth in Total income (%) 25.59 37.12 10.51 Growth in PAT (after deferred tax) (%) -0.60-19.14 10.79 Profitability PBILDT/Total Op. income (%) 21.35 16.04 16.71 PAT (after deferred tax)/total income (%) 8.57 5.05 5.06 ROCE (%) 12.38 9.47 9.63 Solvency Long Term Debt Equity ratio (times) 0.54 0.73 0.74 Overall gearing ratio (times)*@ 1.01 1.26 1.22 Interest coverage (times) 5.89 4.36 3.45 Term debt/gross cash accruals (years) 2.87 3.56 4.14 Liquidity Current ratio (times)@ 0.76 0.84 0.93 Quick ratio (times)@ 0.48 0.59 0.67 Turnover Average collection period (days)@ 38 41 43 Average creditors (days)* 107 101 112 Average inventory (days) 68 64 63 Operating cycle (days) -1 4-6 * Including Acceptances as on the balance sheet date @ Including Bills Discounted, which are largely backed by Letter of Credit After giving effect of the scheme of amalgamation and arrangement, JSWSL posted a total income of Rs.9,358 crore and net loss of Rs.221 crore (including exceptional net foreign exchange loss of Rs.853 crore) during Q1FY14. (This follows our brief rational for entity published on 08 November 2013) DISCLAIMER CARE s ratings are opinions on credit quality and are not recommendations to sanction, renew, disburse or recall the concerned bank facilities or to buy, sell or hold any security. CARE has based its ratings on information obtained from sources believed by it to be accurate and reliable. CARE does not, however, guarantee the accuracy, adequacy or completeness of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. Most entities whose bank facilities/instruments are rated by CARE have paid a credit rating fee, based on the amount and type of bank facilities/instruments. 4
CARE is headquartered in Mumbai, with Offices all over India. The office addresses and contact numbers are given below: HEAD OFFICE: MUMBAI Mr. D.R. Dogra Managing Director Mobile : +91-98204 16002 E-mail : dr.dogra@careratings.com Ms. Meenal Sikchi Vice President Bank Loan & Instrument Rating Mobile: +91-9819009839 mail: meenal.sikchi@careratings.com Mr. Rajesh Mokashi Dy. Managing Director Mobile +91-98204 16001 E-mail: rajesh.mokashi@careratings.com Mr.Ankur Sachdeva Vice President Banking & Financial Services Mobile: +91-9819698985 E-mail: ankur.sachdeva@careratings.com CREDIT ANALYSIS & RESEARCH LTD. HEAD OFFICE 4th Floor, Godrej Coliseum, Somaiya Hospital Road, Off Eastern Express Highway, Sion (East), Mumbai - 400 022 Tel: +91-022- 6754 3456 E-mail: care@careratings.com Fax: +91-022- 6754 3457. KOLKATA Ms. Priti Agarwal Cell: +91-98319 67110 Tel: +91-33- 4018 1600/ 1602 E- mail: priti.agarwal@careratings.com 3rd Flr., Prasad Chambers (Shagun Mall Bldg), 10A, Shakespeare Sarani, Kolkata -700 071 CHENNAI Mr. V Pradeep Kumar Cell: +91 9840754521 Tel: +91-44-2849 7812/2849 0811 Fax: +91-44-2849 0876 Email: pradeep.kumar@careratings.com Unit No. O-509/C, Spencer Plaza, 5th Floor, No. 769, Anna Salai, Chennai - 600 002 AHMEDABAD Mr. Mehul Pandya Cell: +91-98242 56265 Tel: +91-79-40265656 Fax: +91-79-40265657 E-mail:mehul.pandya@careratings.com 32, Titanium, Prahaladnagar Corporate Road, Satellite, Ahmedabad - 380 015. NEW DELHI Ms. Swati Agrawal Cell: +91-98117 45677 Tel: +91-11-2331 8701/ 2371 6199 E-mail: swati.agrawal@careratings.com 3 rd Floor, B -47, Inner Circle, Near Plaza Cinema, Connaught Place, New Delhi - 110 001. BENGALURU Mr. Dinesh Sharma Cell: +91 9900041975 Tel: +080-4115 0445/ 4165 4529 Tele fax: 080-41514599 E-mail: dinesh.sharma@careratings.com Unit No.1101-1102, 11 th Floor, Prestige Meridian II No-30, M.G. Road, Bengaluru -560001. HYDERABAD Mr. Saikat Roy Tel: +91-40-40102030 E-mail: saikat. roy@careratings.com 401, Ashoka Scintilla 3-6-520, Himayat Nagar Hyderabad - 500 029. PUNE Mr. Rahul Patni Cell: +91-78754 33355 Tel: +91-20- 4000 9000 E-mail: rahul.patni@careratings.com 9th Floor, Pride Kumar Senate, Plot No. 970, Bhamburda, Senapati Bapat Road, Shivaji Nagar, Pune - 411 015. JAIPUR Mr. Rahul Jain Cell: +91-9314921496 Tel: +91-0141-4020213/14 E-mail: rahul.jain@careratings.com 304, Pashupati Akshat Heights, Plot No. D-91, Madho Singh Road, Near Collectorate Circle, Bani Park, Jaipur 302016.