Detailed Rationale

CRISIL Ratings has reaffirmed its ratings on the bank facilities of Jindal Steel and Power Ltd (JSPL) and subsequently withdrawn the ratings at the company's request and on receipt of a ‘no-objection certificate’ from the bankers. The withdrawal is in line with CRISIL Ratings policy on withdrawal of bank loan ratings.

 

The ratings reflect the strong operating performance of JSPL and expectation of continued deleveraging. Consolidated financial leverage (ratio of consolidated net debt to earnings before interest, taxes, depreciation, and amortisation [Ebitda]) is expected to be below 1.5 times in fiscal 2022, driven by improved operating profitability outlook due to healthy steel demand and higher steel prices. Consolidated leverage sharply reduced to 1.6 times as on March 31, 2021, due to strong surge in steel prices in the second-half of fiscal 2021, along with access to pre-paid, low-cost iron ore. The ratings also factor in the strong liquidity, reflected in cash and equivalents (including unutilised fund-based limit) of more than Rs 5,000 crore as on December 31, 2021 (less than Rs 1,000 crore as on March 31, 2020) along with management articulation to maintain cash liquidity of more than Rs 2,000 crore at all times.

 

The announced capacity expansion plan of 6 million tonne per annum (mtpa) at Angul in Odisha (to be undertaken under Jindal Steel Odisha Ltd [JSOL], recently incorporated subsidiary of JSPL; expected to be funded in debt-to-equity ratio of 70:30) will not result in any material increase in the consolidated leverage of JSPL as the increase in project debt at JSOL will be offset by debt repayments at JSPL. While the JSPL management has demonstrated its ability to set up large steel plants over the past years, timely completion of the upcoming expansion project without any cost overrun and successful ramping up of operations shall remain key monitorables.

 

Operating performance was strong during the first quarter of fiscal 2022, with per-tonne profitability of more than Rs 28,000. However, moderation has been witnessed in per-tonne profitability from the second quarter, when it reduced to around Rs 21,000 per tonne and further to around Rs 17,400 per tonne in the third quarter of fiscal 2022. This was due to increased raw material prices, mainly on account of rise in coking coal prices and also as the company exhausted its duty-paid iron ore during the first quarter. However, profitability should remain healthy at above Rs 14,000 crore in fiscal 2022 and above Rs 12,000 crore in 2023.

 

Also, operating cash accrual is likely to be healthy to service scheduled debt repayment (including overseas subsidiaries in Mauritius and Australia) in fiscal 2022, with expected ratio of net cash accrual to scheduled debt repayment of more than 1.5 times. Furthermore, presence of adequate liquidity provides cushion against any downside risk to steel demand and prices.

 

The positive outlook reflects the expectation of CRISIL Ratings of sustained healthy operating performance, driven by robust domestic steel demand and realisation over the medium term, which should support continued deleveraging. The positive outlook also factors in the announcement of JSPL to sell its entire stake (96.4%) in subsidiary, Jindal Power Ltd (JPL), to a promoter group entity, Worldone Pvt Ltd, for cash consideration of Rs 3,015 crore, along with transfer of all the assets and liabilities related to JPL. While the deal got the approval of JSPL shareholders on September 03, 2021, it is yet to obtain other requisite approvals, including from lenders of JSPL and JPL. On successful completion, the deal will remove the financial linkages and management control between JSPL and JPL and will reduce consolidated debt by more than Rs 6,000 crore, in addition to the cash proceeds. This would boost the financial risk profile of JSPL. Hence, further developments on the proposed divestment will be key monitorables.

 

The ratings also consider the healthy business risk profile of the company, as reflected in large-scale and cost-efficient operations; healthy product mix with a significant proportion of value-added products, especially in the infrastructure long-steel segment; and improved financial risk profile. However, the ratings are constrained by the weak operating cash flow of overseas subsidiaries against their large debt repayment; moderate raw material integration for domestic business, though partially offset by proximity to raw material sources; and susceptibility to demand and price risk due to the inherently cyclical nature of the steel industry.

Analytical Approach

For arriving at its ratings, CRISIL Ratings has combined the business and financial risk profiles of JSPL and its subsidiaries (including JPL, pending completion of divestment), associates and joint ventures. This is because all these entities are under a common management have strong business and financial linkages.

 

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

The company’s large scale of operations and value-added product profile are relatively less vulnerable to demand slowdown. Furthermore, JSPL is mainly into long-steel infrastructure products and is one of the preferred suppliers of speciality rail products to the Indian Railways and various metro projects in the country. Hence, despite a fragmented market, the company commands a premium because of its superior product profile and strong brand. This is reflected in healthy realisations of more than Rs 55,000 per tonne during the nine months of fiscal 2022 (over Rs 40,000 per tonne for fiscal 2021). With continued improvement in production efficiency and increasing focus on value-added products, market position should remain strong.

 

Healthy and improved operational efficiency in domestic steel

Demand for steel in the domestic market has witnessed strong recovery since August 2020. During fiscal 2021, volume growth was about 19% on-year, supported by a healthy operating rate of above 85%. Furthermore, reduced input cost on account of access to duty-paid iron ore fines and a sharp rise in domestic steel realisations led to a healthy per-tonne Ebitda of more than Rs 17,900 (Rs 9,500 in fiscal 2020) during fiscal 2021.

 

Supported by continued operations, healthy realisations, and increased export sales to offset temporary decline in domestic demand due to the second wave of the pandemic, JSPL reported per-tonne Ebitda of more than Rs 28,000 during the first quarter of fiscal 2022. However, as the company has exhausted its duty-paid iron-ore stocks during the first quarter of the fiscal, and with increase in coking coal prices, per-tonne Ebitda declined from the second quarter, though it is expected at over Rs 18,000 on an average for the fiscal. This will be supported by increase in capacity utilisation and strong operating efficiency due to proximity of the plants to coal and iron ore mines, captive power units, railway sidings and nearness to the Paradip port in Odisha.

 

Strong improvement in financial risk profile, backed by significant deleveraging

Better operating profitability and reduced debt has improved financial risk profile. Consolidated gross debt reduced to Rs 29,310 crore as on March 31, 2021, from Rs 36,825 crore as on March 31, 2020, because of debt repayment of about Rs 1,700 crore (net of loan addition) in domestic and overseas operations, along with divestment of JSIS Oman. Furthermore, strong operating cash accrual during fiscal 2021 resulted in cash and equivalents increasing to more than Rs 7,100 crore as on March 31, 2021, from Rs 914 crore in the previous fiscal. Consequently, consolidated financial leverage (ratio of net debt to Ebitda) improved to 1.6 times and interest coverage ratio to 4.7 times in fiscal 2021 from 4.6 times and 1.9 times, respectively, in 2020. Furthermore, healthy liquidity and strong cash flow during the first nine months of fiscal 2022 was utilised to reduce gross debt to about Rs 20,500 crore (including JPL) as on December 31, 2021.

 

Better domestic operating performance and healthy free cash flow post capital expenditure (capex) should improve financial leverage to below 1.5 times and interest coverage ratio to more than 5.0 times by fiscal 2022 and onwards.

 

Low-cost power generation business, proposed to be divested

The company has low-cost 3,400 megawatt (MW) independent power plants (IPPs) in Chhattisgarh, operated by JPL. Though only about 35% of the IPP capacities are tied up with power purchase agreements, these benefit from their low capital cost and proximity to coal mines. The consequent low cost of generation allows it to sell power in merchant markets. JSPL has recently announced to divest its entire stake in JPL; however, the deal is yet to be completed as it awaits requisite approvals.

 

Weaknesses

Large debt repayment and weak cash flow in overseas subsidiaries

The company made significant debt-funded investment in acquiring coking coal and thermal coal mines in Africa and Australia. However, owing to limited operating cash flow from these assets, the overseas subsidiaries in Mauritius (outstanding debt of about USD 357 million as on December 31, 2021) and Australia (about USD 113 million, post prepayment of USD 105.6 million on September 08, 2021) rely on refinancing of the debt or financial support from JSPL’s India operations. That said, JSPL is expected to generate healthy surplus cash accrual from domestic steel operations to meet overseas debt repayment.

 

Moderate, albeit improving, raw material linkages for domestic businesses along with offtake risk for power

The company relies on imports for meeting coking coal requirement while thermal coal requirement is met partially through linkage coal and the rest through e-auctions and imports. Also, captive iron ore mines of the company were meeting only one-fifth of its total iron ore requirement till September 2021. However, on September 23, 2021, JSPL was announced as the preferred bidder for Kasia iron ore mine in Odisha. The mine has reserves of 278 million tonne and operational capacity of 7.5 mtpa with requisite environmental clearance. The mine has now commenced its operations, thereby improving JSPL’s captive iron ore linkage to > 70% for the existing 8.6 mtpa steel capacity. Furthermore, absence of any long-term PPA for around 65% of the power capacity under JPL exposes it to offtake risk and volatility in merchant rates. Also, this capacity is susceptible to fuel risk because of the absence of fuel linkages (after de-allocation of its coal mines pursuant to the Supreme Court order in September 2014). Nonetheless, secured coal linkages of 3.45 million tonne for the captive power and sponge iron plants of JSPL, and proximity of steel and power plants to coal and iron resources provide comfort. Furthermore, commencement of production at Australian mines from September 2021 provide 25% captive coking coal linkage for the domestic steel business.

 

Susceptibility to demand and price risks

Demand for long-steel products depends on the level of construction and infrastructure activities and any movement in economic cycles. Furthermore, the steel industry remains exposed to global steel prices. While the cost-efficient and integrated domestic steel operations of the company partially cushion profitability against cyclical downturns, it shall remain exposed to inherent price and demand volatility in the steel industry (as reflected in a fluctuating operating margin in the past).

Liquidity: Strong

Consolidated cash accrual is expected at more than Rs 10,000 crore in fiscal 2022 and more than Rs 8,000 crore in 2023 against scheduled debt repayment (including JPL) of around Rs 6,200 crore and Rs 3,400 crore for fiscals 2022 and 2023, respectively. Liquidity is further supported by unencumbered cash and equivalents and unutilised fund-based bank limit of more than Rs 5,000 crore as on December 31, 2021. Flexibility to undertake advance export transactions shall also aid liquidity.

Outlook - Positive

CRISIL Ratings believes sustained healthy operating performance and adequate free cash flow after capex can result in continued deleveraging and strong liquidity, thereby improving financial risk profile over the medium term.

Rating Sensitivity factors

Upward factors

• Sustained healthy operating performance leading to continued deleveraging, with consolidated net debt to Ebitda ratio sustaining below 1.5 times
• Successful completion of JPL divestment, thereby improving business and financial risk profiles

 

Downward factors

• Lower-than-expected profitability or significant debt-funded capex increasing consolidated net leverage to more than 2.0 times
• Weakening of liquidity because of lower cash accrual, resulting in ratio of net cash accrual to debt repayment below 1.5 times on a sustained basis or reduction in liquidity to below Rs 2,000 crore

About JSPL

JSPL, a part of the diversified OP Jindal group, is one of India's major steel producers with sizeable presence in power generation and mining. It has installed capacity of 8.6 mtpa of steel, with plants in Angul and Raigarh, Chhattisgarh.

 

A subsidiary of JSPL, JPL (proposed to be divested) has a total commissioned power capacity of 3,400 MW. The international operations of the group include interests in mining assets in resource-rich locations such as Australia, Indonesia, South Africa and Mozambique.

Key Financial Indicators (CRISIL Ratings-adjusted numbers)

As on/for the period ended March 31	Unit	2021	2020
Operating Income	Rs crore	38,988	36,944
Profit after tax (PAT)	Rs crore	4,267	(400)
PAT margin	%	10.9	(1.1)
Adjusted debt/adjusted networth**	Times	1.56	2.75
Interest coverage	Times	4.67	1.88

**Adjustments include reversal of fair valuation of property, plant and equipment (land, buildings and plants and machinery), deferred tax on adjustments and other adjustments made during adoption of Ind AS norms on networth.

Any other information: Not applicable

Annexure - Details of Instrument(s)

*Proposed capex LC

Annexure – List of entities consolidated

* On April 26, 2021, the JSPL board approved divestment of its entire equity stake in JPL, subject to receipt of requisite approvals. This was approved by the shareholders in the EGM dated September 03, 2021