Detailed Rationale

CRISIL Ratings has upgraded its rating on the short-term bank facilities of Jindal Stainless Ltd (JSL; a part of the Jindal Stainless group) to ‘CRISIL A1+’ from ‘CRISIL A1’ while reaffirming its ‘CRISIL A+/Stable’ rating on the long-term bank facilities. The Jindal Stainless group includes, JSL, Jindal Stainless (Hisar) Ltd (JSHL) and their subsidiaries.

 

The upgrade in the short-term rating factors in the healthy liquidity profile of the group, supported by healthy cash accrual due to strong operating performance along with deleveraged balance sheet and minimal long-term debt obligation over the medium term.

 

CRISIL Ratings expects the group to achieve an aggregate net debt to earnings before interest, tax, depreciation and amortisation (EBITDA) ratio of less than unity by March 31, 2022, against around 2.5 times, as on March 31, 2019. The rating also factors in healthy business risk profile of the Jindal Stainless group, buoyed by its market leadership position in the domestic stainless steel (SS) industry, both in terms of manufacturing capacity and sales volume, and sizeable export presence. With a combined steel melting capacity of nearly 1.9 million tonnes per annum (mtpa), the group is also among the top ten SS manufacturers globally.

 

These strengths are partially offset by susceptibility of profitability to volatility in input cost, realisations and cyclicality in the SS industry.  Business operations also face competition from cheaper Indonesian and Chinese imports. Substantial increase in imports may adversely impact realisation and volumes, and hence, remains a key monitorable.

 

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

 

In the first quarter of fiscal 2022, volumes fell by 11.1% on-quarter, owing to disruptions led by the second wave of the Covid-19 pandemic. However, increased focus on higher grades and exports led to better product mix that aided margin despite higher input prices. Further, higher inventory valuations led to an EBITDA per tonne of about Rs 25,000, which is significantly higher than Rs 13,500-15,500 seen over the last few years. Sustainability of the margin going forward and impact of any further waves of the pandemic remain key monitorables.

 

*downstream capacities being expanded include HRAP (hot rolled annealed and pickled) capacity – to increase by 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 – 1.7x to 0.02 mtpa

Analytical Approach

For arriving at its ratings, CRISIL Ratings used its criteria for rating entities in homogenous groups and combined the business and financial risk profiles of JSL, JSHL and their subsidiaries. These entities, collectively referred to as the Jindal Stainless group, are in the same line of business and have strong business and financial linkages, as well as common management and promoters. Also, JSHL 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.

 

Further, JSHL and JSL are currently in the midst of a merger process with approvals received from their respective boards, Securities and Exchange Board of India (SEBI) and stock exchanges, and with the scheme of merger filed with National Company Law Tribunal (NCLT).

 

Please refer Annexure - List of entities consolidaed, 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) -- helped 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 Jajpur plant focusses on South and Eastern markets) and product segments (the Hisar plant focusses on valued-added products [VAP] such as a SS blades used in razors and coin blanks for national and foreign mints, while the Jajpur plant is more focused on mass products).

 

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

 

Both the plants together export nearly 15% of overall production in fiscal 2021. Its major export markets include Europe, South East Asia and Middle East.

 

Improvement in operating efficiencies

While profitability is largely dependent on price of inputs (mainly nickel and chrome ore) and the product mix (200, 300, 400 series), the group has taken several measures that improved its operating performance. The JSL plant has installed a railway siding to transport raw material and finished goods, leading to savings on logistics costs and 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 key input in making SS) and is supported by a captive power plant of 264 megawatt (MW) that covers bulk of its electricity requirement. These initiatives coupled with stable demand indicators 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, greater focus on the VAP segment has ensured healthy average utilisation levels of around 80% over fiscals 2015 to 2021. The group also has the flexibility to shift production to SS series with lower nickel content (such as 400 and 200 series) depending on market conditions, which adds to sustainability of operations. These improvements helped in maintaining EBITDA /tonne at Rs 13,500-15,500 during fiscals 2019 and 2020, even though it faced higher competition from imports. Further, higher realisations and inventory gains, coupled with operating efficiencies resulted in EBITDA/tonne of about Rs 19,000 in fiscal 2021.

 

In the first quarter of fiscal 2022, the group saw a significant improvement in the EBITDA/tonne to around Rs 25,000 which has further boosted its liquidity profile. The improvement can primarily be attributed to higher realisations, aided by better product mix, impact of cost-efficiency measures undertaken by the company and positive inventory valuations on account of continuously rising input prices. Ability to maintain EBITDA/tonne of Rs 18,000-20,000 on a sustained basis is expected to substantially improve the business and financial risk profiles of the group and will remain a key rating monitorable.

 

Significant improvement in financial risk profile, supported by debt reduction

Aided by healthy operating performance, JSL has been able to substantially reduce consolidated external debt to Rs 1,824 crore as on June 30, 2021, from Rs. 3,488 crore as on March 31, 2019; JSHL too pared its consolidated debt to Rs 1,448 crore from Rs 2,367 crore, over the same period. CRISIL Ratings understands that the group reduced debt in such a way that bulk of the scheduled term debt obligations over the next two fiscals are already paid and it has only about Rs 239 crore scheduled payments to be made over this period. This provides the group sufficient cushion to absorb ongoing capex and underpins the management’s strong focus on debt reduction.

 

Consequently, the interest coverage ratio improved to 4.4 times in fiscal 2021, from around 2.6 times in fiscal 2019, at the group level.

 

Prudent working capital management

With improving scale, the group saw better bargaining power with suppliers and customers. Receivables for both entities have been below 30 days over the last three fiscals, with payables at 75-90 days. The group has taken several steps to minimise inventory, especially that of nickel (the costliest input 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 group is the largest player in India, it faces competition from imports mainly from Indonesia, which is a low-cost producer of SS as the country has nickel deposits (main input material for 300 series SS). Sharp rise in imports from Indonesia in fiscal 2020 put pressure on the margin and volumes of domestic players. The countervailing duty imposed on Indonesian imports by the Government of India in August 2020, was rescinded during the Union Budget for fiscal 2022. Even though such imports are largely limited to the 300 series (which has the highest 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, remain a key monitorable. The group has taken several steps to gain ability to pass on the price hike, including tie-ups with original equipment manufacturers in the automobile, lifts and other industrial segments with pass-through clauses in contracts, and by entering into 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 would also depend on the underlying demand scenario, and hence, will be a key monitorable.

Liquidity: Strong

Liquidity profile of the group remains strong, backed by expected net cash accruals of Rs 2,000-2,200 crore for fiscals 2022 and 2023, sufficient to meet the yearly debt obligation (for JSL and JSHL at standalone level) of around Rs 85 crore for fiscal 2022 and around Rs 154 crore for fiscal 2023. Liquidity is further supported by unutilised fund-based limit of Rs 140 crore (on drawing power) in JSL and Rs 104 crore in JSHL, as on July 31, 2021. Also, incremental capex is expected to be majorly funded through internal accruals which will limit any increase in the leveraging levels. Incremental cash flow, absence of any significant term debt obligation over the next two fiscals and unutilised working capital lines should comfortably cover any incremental working capital requirement and capacity expansion plans.

Outlook: Stable

The Jindal Stainless group should 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

• Significantly higher-than-expected revenue and cash accrual, supported by healthy demand and lower imports
• Further reduction in debt, coupled with stable profitability (EBITDA margin), resulting in interest coverage ratio sustaining at over 7 times for Jindal Stainless group

 

Downward Factors

• Lower-than-expected cash accrual or significant debt-funded capex, leading to a sharp increase in leverage
• Weakening of profitability (EBITDA margin) due to subdued demand or elevated imports, resulting in interest coverage ratio of less than 3 times for Jindal Stainless group.

About the Company

JSL, a listed entity, is one of the largest manufacturers of SS in India with steel melting capacity of 1.1 MTPA. Its plant is in Jajpur, Odisha, and is supported by a captive power plant of 264 MW, ferro-alloy plant of 0.25 MTPA, and CRAP plant of 0.45 MTPA. Operations are further supported by 1.6 MTPA hot strip mill owned by associate company, Jindal United Steel Ltd (JUSL; JSL owns 26% of equity in the company). JUSL converts SS slabs produced by JSL into HR coils, while the coke oven plant owned by another associate entity, Jindal Coke Ltd (JSL owns 26% equity) supplies JSL with coke and coke oven gas. JSHL owns 34.54% of equity of JSL.

 

JSHL, a listed entity, has a 0.8 MTPA integrated SS plant in Hisar, Haryana. It procures ferro chrome from JSL as well as open market sources. Its plant is the largest manufacturer of SS blades, used in razors, globally. Also, manufacturers various grades of specialty SS products.

 

JSL and JSHL are currently in the process of merging. Approvals from board of directors of both companies, SEBI and stock exchanges are in place. It has filed the scheme of merger before NCLT and is currently awaiting further procedures as part of the NCLT process.

 

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 to this, the company has also 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 inter corporate 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