Rating Rationale

Strengths
* Superior market position: The company's market position is backed by its ability to manufacture higher grades and value-added products. JSPL makes specialised structural steel (medium and light structural mill and railway and universal beam mill) and high-grade plates (with application in boilers for power plants and defence equipment), which are relatively less vulnerable to demand slowdown. While the long products segment is fragmented, the company commands a premium due to its superior product profile and strong brand. Restarting of its DRI plant and ramping up of the blast furnace and basic oxygen furnace plant in Angul may strengthen the market position over the medium term. In fiscal 2020, domestic production volume increased 13% to 6.30 million tonne from 5.59 million tonne in the previous fiscal. With resumption of production at the CGP DRI plant, volume run rate is estimated to have reached 6-6.5 lakh tonne per month (or 6-6.5 mtpa) by the end of March 2020.

* Improving operational efficiency: Per-tonne operating profitability for the steel business declined to around Rs 9,892 in fiscal 2020 from Rs 12,172 in the previous fiscal. While the expected decline in steel demand and lower realisation should result in moderation in profitability in fiscal 2021, it shall remain healthy with stable capacity utilisation rates, reduced input cost with expected reduction in coking coal prices, cost saving with respect to coke after the installation of four coke oven batteries and access to duty-paid raw material lying with SMPL. Improved mining operations in Mozambique and stabilisation of South Africa mines may further improve the operating performance over the medium term. Proximity of plants to coal and iron ore mines, captive power units and railway sidings and nearness to the Paradip port, Odisha, also support the operating efficiency. Consolidated operating margin should sustain at 20-22% over the medium term.

* Well-diversified operations: In addition to steel operations in India, JSPL benefits from the diversity offered through its 3,400 megawatt (MW) independent power plants (IPPs) in Tamnar, Chhattisgarh, operated by Jindal Power Ltd (JPL, subsidiary of JSPL) and steel manufacturing operations in Oman through Shadeed Iron & Steel Company (Shadeed; subsidiary of JSIS Oman). Operations at Shadeed benefit from moderate utilisation at 70-75% and efficiency through proximity to the gas source. Though only 24% of IPPs' capacities are tied up with power purchase agreements (PPAs), these capacities benefit from their low capital costs, with current debt per MW at around Rs 2.1 crore. The consequent low cost of generation and proximity to coal mines are likely to benefit power operations over the medium term. Furthermore, JPL has been declared an L-1 bidder for additional 420 MW capacity under PFC Pilot Scheme-II, which shall increase the PPAs to 38% of total IPPs' capacity for the company.

Weaknesses
* Average, albeit improving, financial risk profile: Despite sizeable debt, debt/EBITDA is expected to improve to around 3.5 times in the next two fiscals from around 4.7 times in fiscal 2020, backed by better domestic operating performance and steps taken to improve the capital structure (divestment of non-core assets and faster deleveraging). However, debt levels are expected to remain high because of low cash generation at the entities in Australia and Mozambique and refinancing/restructuring underway. The timely refinancing of overseas debt and successful closure of stake sale of JSIS Oman, along with utilisation of said funds for debt reduction, will remain key monitorables.

* Susceptibility to demand and price risk: Demand for long steel products depends upon the level of construction and infrastructure activities and any movement in economic cycles. Furthermore, the steel industry remains exposed to global steel prices. After achieving high growth of 8-9% in the past two fiscals, the demand momentum is expected to fizzle out in the current fiscal, with expected de-growth in domestic steel demand because of reduced economic growth and weak performance across end-user segments amid the Covid-19 pandemic. While the company is resorting to increased export sales to offset the fall in domestic demand, this will result in reduced margin, as export sales are 15-20% lower than domestic realisations. Any significant impact on sales and, thereby, cash accrual because of demand shock from the pandemic will remain key monitorables

* Low raw material linkage, partially offset by proximity to raw material sources: JSPL's current captive iron ore mines meet only one-fifth of its total iron ore requirement. Furthermore, absence of long-term PPAs for around 75% of the power capacity in Tamnar exposes the company to offtake risk and volatility in merchant rates. Moreover, this capacity is susceptible to fuel risk due to 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 in the recent past of 6.5 million tonne for the captive power plants and sponge iron plants and proximity of steel and power plants to coal and iron resources provide comfort. Furthermore, JSPL's recent win of the Guali mine, with iron ore reserve of 198 million tonne, in recent Odisha mine auctions will further increase its raw material linkages.