Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AA-/Stable/CRISIL A1+’ ratings on the bank facilities and debt programme of Jindal Stainless Ltd (JSL; a part of the Jindal Stainless group). The Jindal Stainless group includes JSL, Jindal Stainless (Hisar) Ltd (JSHL: CRISIL AA-/Stable/CRISIL A1+) and their subsidiaries.

 

The ratings continue to factor in the healthy business risk profile of the Jindal Stainless group backed by sustainable improvement in operating efficiency driven by better earnings before interest, tax, depreciation, and amortisation (Ebitda) per tonne. This has also resulted in improvement in the financial risk profile led by strong liquidity, deleveraged balance sheet and minimal long-term debt obligation over the medium term. The ratings also factor in the market leadership of the group in the domestic stainless steel (SS) industry, both in terms of manufacturing capacity and sales volume, and its sizeable export presence. With a combined steel melting capacity of nearly 1.9 million tonne per annum (MTPA), the group is among the top 10 SS manufacturers globally.

 

These strengths are partially offset by susceptibility of profitability to volatility in input cost and realisations and to cyclicality in the SS industry. The group also faces competition from cheaper Indonesian and Chinese imports. Substantial increase in imports may adversely impact realisation and volume and remains a key monitorable.

 

The group is undertaking capital expenditure (capex) of Rs 2,600 crore over the next three fiscals to increase its SS melting capacity by 1 MTPA, along with higher downstream capacities*, and for improving cost efficiency. CRISIL Ratings understands that majority of the capex will be funded through internal accrual and hence will not cause any significant rise in leverage. However, any additional debt-funded capex or acquisition will remain a key monitorable.

 

*Downstream capacities being expanded include hot-rolled annealed and pickled capacity – to increase 1.6 times to 1.25 MTPA, CRAP (cold-rolled annealed and pickled) – 1.7 times to 0.75 MTPA, precision strip – 3 times to 0.06 MTPA, and blade steel – 1.7 times to 0.02 MTPA.

Analytical Approach

For arriving at its ratings, CRISIL Ratings has applied its criteria for rating entities in homogenous groups and combined the business and financial risk profiles of JSL, JSHL and their subsidiaries. The entities, collectively referred to as the Jindal Stainless group, are largely in the same line of business and have strong business and financial linkages as well as common promoters. Also, JSHL has extended cash support to JSL and there exists a structure where JSL and JSHL have issued corporate guarantees for the debt facilities of each other.

 

JSHL and JSL are in the midst of a merger, with approvals received from their respective boards and stock exchanges (National Stock Exchange and Bombay Stock Exchange), and scheme of merger filed with the National Company Law Tribunal.

 

Please refer Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths

Superior market position coupled with a sizeable export presence

The group - through its manufacturing plants in Hisar, Haryana (JSHL plant with capacity of 0.8 MTPA); and Jajpur, Odisha, (JSL plant with 1.1 MTPA) — is the largest manufacturer of SS flat products in India. Capabilities to manufacture a wide variety of grades across all series of SS (mainly 200, 300 and 400 series —classified based on exact content of nickel and other alloys) — helps the group cater to a diversified end-user base comprising automobile-railway-transportation (ART), architecture-building-construction (ABC), process industries (food and pharmaceuticals), consumer goods (durables, kitchenware) and healthcare (equipment). The two plants have well-defined target geographies (the Hisar plant focusses on the northern and western markets while the Jajpur plant focusses on the southern and eastern markets) and product segments (the Hisar plant focusses on valued-added products such as SS blades used in razors and coin blanks for national and foreign mints, while the Jajpur plant is focused on mass products).

 

The capex announced by the group includes increasing SS melt capacity to 2.1 MTPA in the Jajpur plant, which will further consolidate its market position. It is also adding downstream capacities in both plants, along with capex to improve cost efficiency.

 

The plants together exported nearly 15% of their combined output in fiscal 2021, with key markets being Europe, South-East Asia and the Middle East. Share of exports to Russia is low compared to overall volumes.

 

Sustainable improvement in Ebitda per tonne led by operating efficiency

During the first nine months of fiscal 2022, combined volume rose 31.3% on-year, led by healthy demand for SS. Increased focus on higher grades and exports led to better product mix that aided profitability despite higher input prices. This, along with positive inventory valuation and cost efficiency measures, led to Ebitda per tonne of about Rs 28,000, which is significantly higher than around Rs 19,000 seen in fiscal 2021. While positive inventory valuation on account of continuously rising input prices have aided profitability, these benefits may wane as prices normalise. CRISIL Ratings expects the group to generate Ebitda per tonne of around Rs 20,000 on a sustained basis.

 

While profitability is largely dependent on the prices of inputs (mainly nickel and chrome ore) and the product mix (200, 300, 400 series), the group has undertaken several measures that have improved its operating performance. The JSL plant has installed a railway siding and inland container depot (ICD) to transport raw materials and finished goods, leading to savings on logistics costs, and has substituted high-cost propane with cheaper coke oven gas. Furthermore, the JSL plant is in Odisha, which has 93% of India’s chromite ore reserves (apart from nickel, chrome is a key input in making SS) and is supported by a captive 264 megawatt (MW) power plant which meets the bulk of its electricity requirement. These initiatives, along with stable demand, have significantly improved capacity utilisation, with production rising to 0.82 million tonne in fiscal 2021 from 0.45 million tonne in fiscal 2015. In the JSHL plant, focus on valued-added products ensured healthy average utilisation of around 80% over fiscals 2015-21. The group also has flexibility to shift production to SS series with lower nickel content (such as 400 and 200 series) depending on market conditions, which enhances sustainability of operations.

 

Significant improvement in financial risk profile backed by debt reduction

Aided by healthy operating performance, JSL reduced consolidated external debt to Rs 2,118 crore as on December 31, 2021, from Rs 3,488 crore as on March 31, 2019. JSHL also pared its consolidated debt to Rs 1,792 crore from Rs 2,367 crore, over the same period. CRISIL Ratings understands the group reduced debt in such a way that bulk of the scheduled term debt obligation over the next two fiscals has already been paid and payment of only about Rs 165 crore is scheduled till fiscal 2023 end. This provides sufficient cushion to absorb ongoing capex and underpins the management’s strong focus on debt reduction.

 

Prudent working capital management

With Improving scale, the group saw better bargaining power with suppliers and customers. Receivables were below 30 days over the past three fiscals, with payables at 75-90 days. The group has taken several steps to minimise inventory, especially that of nickel (the costliest raw material), through regular monitoring to minimise any impact of price volatility. It also maintains a healthy order book to better manage pricing risk.

 

Weaknesses

Threat from imports

While the Jindal Stainless group is the largest SS player in India, it faces competition from imports mainly from Indonesia, which is a low-cost producer of SS as it has nickel deposits (main input for 300 series SS), and China. Sharp rise in imports from Indonesia in fiscal 2020 put pressure on the margins and volumes of domestic players. The countervailing duty (CVD) imposed on Indonesian imports by the Government of India in August 2020 was rescinded during the Union Budget for fiscal 2022. In the Union Budget for fiscal 2023, the government has revoked certain anti-dumping duties and CVD on SS products to contain their prevailing high prices. Even though imports are likely to be largely limited to the 200 and 300 series (which has high nickel content, a resource not available in India), any significant rise in imports can adversely impact realisation and volumes for domestic players and thus remains a key monitorable.

 

Susceptibility to risks relating to input cost, realisations and cyclicality in the SS industry

Prices of key raw materials such as SS scrap and finished SS products are largely linked to nickel prices, which tend to be highly volatile. This led to unfavourable price cycles for the sector in the past. Moreover, as certain amount of nickel is always maintained as inventory, price fluctuations led to inventory gains or losses in the past and thus remains a key monitorable. The group has taken several steps to gain ability to pass on input price increases, including tie-ups with original equipment manufacturers in the automotive, lifts and other industrial segments with pass-through clauses in contracts, and by entering volume-based tie-ups with its distributors where pricing is set on a periodic basis. However, the ability to pass on the full impact of price hike will also depend on the underlying demand scenario. Resultantly, the recent run up in nickel prices (up from around USD 30,000 per tonne to around USD 100,000 per tonne over the past week) may impact volumes of SS grades with high Nickel content as their prices rise in tandem. While the group has the ability to shift between various grades of SS, impact of the elevated nickel prices on volumes will be a key monitorable in the near term.

Liquidity: Strong

Liquidity is backed by expected net cash accrual of Rs 2,500-3,000 crore for fiscals 2023 and 2024, sufficient to meet yearly principal debt obligation (for JSL and JSHL at standalone level) of around Rs 165 crore for fiscal 2023 and around Rs 350 crore for fiscal 2024. Liquidity is further supported by unutilised fund-based limit of Rs 124 crore (on drawing power) in JSL and Rs 166 crore in JSHL as on December 31, 2021. Incremental capex is expected to be funded majorly through internal accrual, which will limit any increase in leverage. Incremental cash flow, absence of any significant term debt obligation over the next two fiscals and unutilised working capital limit should comfortably cover any incremental working capital requirement and capacity expansion plans.

Outlook Stable

The Jindal Stainless group will likely sustain its healthy operating performance over the medium term, aided by healthy demand for SS. Absence of any significant term debt obligation over the next two fiscals should help sustain the financial risk profile.

Rating Sensitivity factors

Upward factors

• Sustained improvement in profitability with Ebitda per tonne reasonably higher than the current expectation of Rs 20,000 per tonne
• Further reduction in debt, aided by stable profitability and healthy cash accrual

 

Downward factors

• Weakening of profitability with Ebitda per tonne lower than Rs 16,000 per tonne on a sustained basis
• Lower-than-expected cash accrual or significant debt-funded capex or acquisition, leading to a sharp increase in leverage ratio

About the Group

JSL, a listed entity, is one of the largest manufacturers of SS in India with steel melting capacity of 1.1 MTPA. Its plant in Jajpur is supported by a captive power plant of 264 MW, ferroalloy plant of 0.25 MTPA, and CRAP plant of 0.45 MTPA. Operations are supported by 1.6 MTPA hot strip mill owned by associate company Jindal United Steel Ltd (JUSL; 26% owned by JSL). JUSL converts SS slabs produced by JSL into hot-rolled coils, while the coke oven plant owned by another associate entity, Jindal Coke Ltd (26% owned by JSL), supplies JSL with coke and coke oven gas. JSHL owns 33.37% of equity in JSL (as on September 30, 2021).

 

JSHL, a listed entity, has a 0.8 MTPA SS plant in Hisar. It procures ferrochrome from JSL as well as from the open market. Its plant is the largest manufacturer of SS blades, used in razors, globally. The company also manufacturers various grades of speciality SS products.

 

In fiscal 2020, JSL had exited the corporate debt restructuring process by redeeming Rs 558 crore of optionally convertible redeemable preference shares held by its lenders and additionally paying entire recompense liability of Rs 275 crore. In addition, the company redeemed secured redeemable non-convertible debentures having outstanding balance of around Rs 52 crore in January 2021, ahead of scheduled maturity of these instruments.

Key financial indicators – JSL consolidated – CRISIL Ratings-adjusted numbers

As on / for the period ended March 31	Unit	2021	2020
Operating income	Rs crore	12,205	12,905
Adjusted profit after tax (PAT)	Rs crore	419	73
Adjusted PAT margin	%	3.4	0.6
Adjusted debt/adjusted networth	Times	0.99	1.49
Interest coverage*	Times	3.8	2.2

*Adjusted for interest expense on intercorporate deposits (ICDs)

 

Key financial indicators – JSHL consolidated – CRISIL Ratings-adjusted numbers

As on / for the period ended March 31	Unit	2021	2020
Operating income	Rs crore	9,400	9,379
Adjusted PAT	Rs crore	696	401
Adjusted PAT margin	%	7.4	4.3
Adjusted debt/ adjusted networth	Times	0.51	1.11
Interest coverage*	Times	5.1	3.0

*Adjusted for interest income on ICD given to JSL

Any other information: Not applicable