Detailed Rationale

CRISIL Ratings has upgraded its ratings on the bank facilities of Jindal Steel and Power Ltd (JSPL) to ‘CRISIL A+/CRISIL A1+’ from 'CRISIL A-/CRISIL A2+’, while revising its outlook on the long-term rating to ‘Positive’ from ‘Stable’.

 

The upgrade reflects a stronger-than-expected operating performance of JSPL and expectation of faster 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 against earlier expectations of below 2.0 times, 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, against the earlier expectation of below 2.3 times, due to stronger-than-expected surge in steel prices in the second half of fiscal 2021 along with access to pre-paid, low-cost iron ore. The upgrade also factors in improved liquidity risk profile, reflected in cash & equivalents (including unutilised fund-based limit) of Rs 3,000 crore as on June 30, 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 (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 JSPL’s consolidated leverage as the increase in project debt at JSOL will be offset by debt repayments at JSPL. While JSPL’s 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. Despite expected moderation in per-tonne profitability from the second quarter due to increased raw material prices, as the company exhausted its duty-paid iron ore during the first quarter, profitability for JSPL should remain healthy at above Rs 14,000 crore in fiscal 2022 and above Rs 12,000 crore in fiscal 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. Also, JSPL may refinance its overseas debt with a longer tenor debt, which could further strengthen its liquidity profile.

 

The ‘Positive’ outlook reflects CRISIL Ratings expectation of sustained healthy operating performance, driven by robust domestic steel demand and realisation in the near to medium term, which should support continued deleveraging. Furthermore, the positive outlook factors in JSPL’s recent announcement to sell entire stake (96.4%) in its 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 has obtained the approval of JSPL’s 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 JSPL’s 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 remain key monitorables.

 

Sustained healthy operating performance supporting continued deleveraging, with consolidated financial leverage reducing sustainably to below 1.5 times by fiscal 2022 and onwards, and successful completion of the proposed JPL divestment may result in a rating upgrade.

 

The ratings also consider JSPL’s healthy business risk profile, as reflected in large-scale and cost-efficient operations; healthy product mix with significant proportion of value-added products, especially in infrastructure long-steel products; and improved financial risk profile. However, the ratings are constrained by 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 inherent cyclical nature of steel industry.

 

CRISIL Ratings has withdrawn its rating on Rs 237.4 crore NCDs (See the Details of Rating Withdrawn) of JSPL on receipt of independent confirmation of their redemption. The rating is withdrawn in line with CRISIL Ratings’ withdrawal policy.

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 - Details of Consolidation, 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 largely into long-steel infrastructure products and is one of the preferred suppliers for 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 at around Rs 54,000 per tonne during the first quarter 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, the company should maintain its strong market position.

 

Healthy and improved operational efficiency in domestic steel

Demand for steel in the domestic market witnessed strong recovery since August 2020. During fiscal 2021, the company had volume growth of about 19% on-year, supported by a healthy operating rate of above 85%. Further, 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 ongoing Covid-19 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 fiscal 2022, per-tonne EBITDA is likely to dip in the remaining nine months of the fiscal, though it is expected at over Rs 16,000 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, supported by significant deleveraging

JSPL’s financial risk profile has improved significantly, driven by better operating profitability and reduced debt. 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. Further, strong operating cash accrual during fiscal 2021 resulted in cash & equivalents increasing to more than Rs 7,100 crore as on March 31, 2021, from Rs 914 crore a year ago. Consequently, JSPL’s 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 fiscal 2020. Further, healthy liquidity and strong cash flow during the first quarter of fiscal 2022 was utilised to reduce gross debt to about Rs 23,000 crore (including JPL) as on June 30, 2021.

 

Better domestic operating performance and healthy free cash flow post capital expenditure (capex) should lead to the financial leverage improving to below 1.5 times and interest coverage ratio 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 25% of the IPPs’ capacities are tied up with power purchase agreements (PPAs), these capacities 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 September 13, 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 requirement. JSPL’s ability to timely obtain regulatory approvals for remittance of funds to overseas subsidiaries for debt repayment or refinancing of overseas debt with longer tenor debt will be key monitorable.

 

Moderate raw material linkages for domestic steel & power businesses along with offtake risk for power

The company’s current captive iron ore mines meet only one-fifth of its total iron ore requirement. Also, it 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. Furthermore, absence of any long-term PPA for around 75% 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 JSPL’s captive power and sponge iron plants, and proximity of steel and power plants to coal and iron resources provide comfort. Further, commencement of production at Australian mines will provide 25% captive coking coal linkage for JSPL’s 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 company’s cost-efficient and integrated domestic steel operations partially cushion its 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 about Rs 10,000 crore in fiscal 2022 and more than Rs 8,000 crore in fiscal 2023 (over Rs 11,000 crore in fiscal 2021) against debt repayment of around Rs 6,400 crore and Rs 3,400 crore (around Rs 5,800 crore) for fiscals 2022 and 2023, respectively. Liquidity is further supported by unencumbered cash and equivalents and unutilised fund-based bank limit of about Rs 3,000 crore as on June 30, 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 post capex, can result in continued deleveraging, strong liquidity and improved financial profile.

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, thus increasing the consolidated net leverage to more than 2.0 times
• Weakening of liquidity because of lower cash accrual, resulting in the 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 the Company

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 group's international operations 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

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs crore)	Complexity level	Rating assigned with outlook
NA	Cash credit	NA	NA	NA	1,677.00	Not Applicable	CRISIL A+/Positive
NA	Letter of credit and bank guarantee	NA	NA	NA	8,903.74		CRISIL A1+
NA	Proposed non-fund-based bank loan facility	NA	NA	NA	2,289.62		CRISIL A1+
NA	Proposed letter of credit*	NA	NA	NA	2,500.0		CRISIL A+/Positive
NA	Term loan -1	NA	7.50%– 10.55%	Sep-21	179.83		CRISIL A+/Positive
NA	Term loan -2	NA		Sep-22	422.82		CRISIL A+/Positive
NA	Term loan -3	NA		Jun-24	1,496.44		CRISIL A+/Positive
NA	Term loan – 4	NA		Sep-24	900.46		CRISIL A+/Positive
NA	Term loan – 5	NA		Mar-25	465.50		CRISIL A+/Positive
NA	Term loan – 6	NA		Jun-25	1,312.92		CRISIL A+/Positive
NA	Term loan – 7	NA		Sep-27	1,489.99		CRISIL A+/Positive
NA	Term loan – 8	NA		Sep-28	1,371.39		CRISIL A+/Positive
NA	Term loan – 9	NA		Jun-36	4,432.76		CRISIL A+/Positive

Annexure – List of entities consolidated

* On April 26, 2021, JSPL’s Board has approved divestment of its entire equity stake in JPL, subject to receipt of requisite approvals. The same was approved by the shareholders in the EGM dated September 03, 2021