Moody's Investors Service has confirmed JSW Steel Limited's Ba2 corporate family rating (CFR) and Ba2 senior unsecured debt rating, which saw stock falling over 3 per cent in intraday trade on the Bombay Stock Exchange. The global rating agency has also changed the outlook of Sajjan Jindal-led company to negative from ratings under review.
"The rating confirmation recognises that while JSW's credit profile will deteriorate reflecting the challenges brought by the coronavirus pandemic, we believe that the company's financial metrics will likely recover to levels commensurate with the current ratings by the fiscal year ending March 2023 (fiscal 2023)," says Kaustubh Chaubal, a Moody's Vice President and Senior Credit Officer.
"However, JSW's leverage and coverage will remain weak until that time, and the negative outlook indicates the risk of a downgrade if the steel industry does not recover as we currently expect or if there is a slower-than-anticipated recovery in the company's financial metrics," adds Chaubal.
Moody's sees steel consumption in India, JSW's key operating market, to contract by at least 15 per cent through fiscal 2021 due to weak automotive and manufacturing demand, even as infrastructure investments rise. India's economic growth will also remain materially lower than in the past with real GDP shrinking 3.0 per cent, it said.
A contracting steel market in India will hurt JSW, but this is partially mitigated by the company's market position and brand strength. Moody's further expects JSW will deploy any steel surpluses towards exports. The company's export shipments surged in Q1 of fiscal 2021 when domestic demand was soft. Key export destinations included South East Asia, Southern Europe, the Middle East and China, it said.
"The confirmation of the ratings also reflects JSW's inherently strong operating profile, with credit metrics supportive of a higher rating prior to the pandemic. The outlook on the company's ratings was positive until March 2020, when it was changed to stable in anticipation of a slow recovery in credit metrics," Moody's said.
Moody's said that the rapid and widening spread of the coronavirus outbreak, deteriorating global economic outlook, falling oil prices and asset price declines are creating a severe and extensive credit shock across many sectors, regions and markets. The combined credit effects of these developments are unprecedented. The steel sector has been one of the sectors most significantly affected by the shock, given its sensitivity to consumer demand and sentiment.
More specifically, the weaknesses in JSW's credit profile, including its exposure to steel demand for manufacturing and volatile material costs, have left it vulnerable to shifts in market sentiment in the current unprecedented operating conditions, and it remains vulnerable to further disruptions caused by the ongoing pandemic, the rating agency said.
By Chitranjan Kumar