Moody's Investors Service revises outlook on JSW Steel to negative

The outlook on the company's ratings was positive until March 2020, when it was changed to stable in anticipation of a slow recovery in credit metrics
Moody's Investors Service today revised outlook for Sajjan Jindal-led JSW Steel to negative from under review reflecting deterioration in credit profile due to challenges brought by the pandemic.

"We believe that the company's financial metrics will likely recover to levels commensurate with the current ratings by the fiscal year ending March 2023 (fiscal 2023)," the agency quoted Kaustubh Chaubal, Vice President and Senior Credit Officer as saying.

"However, JSW's leverage and coverage will remain weak until that time, and the negative outlook indicates the risk of a downgrade if the steel industry does not recover as we currently expect or if there is a slower-than-anticipated recovery in the company's financial metrics," added Chaubal.

Moody's expects JSW's leverage, as measured by adjusted debt/adjusted EBITDA, will increase to an estimated 6.4x by the end of fiscal 2021, up from 6.0x a year earlier, and stay in breach of the 4.5x downgrade trigger for the company's Ba2 CFR. However, JSW should be able to restore its metrics to appropriate levels by fiscal 2023, considering its relatively strong business profile, brand strength and technological capabilities, which will help the company sustain above-average profitability.

"While the deterioration in demand caused by the pandemic will cause JSW's EBIT margin to decline to single digits for the first time in 14 years, the company's profitability at 8 percent will still be at the higher end of its Ba rating range," said Chaubal.

Moody's expects steel consumption in India, JSW's key operating market, to contract by at least 15 percent through fiscal 2021 because of weak automotive and manufacturing demand, even as infrastructure  investments rise. India's economic growth will also remain materially lower than in the past with real GDP shrinking 3.0 percent.

A contracting steel market in India will hurt JSW, but this is partially mitigated by the company's market position and brand strength. Moody's further expects JSW will deploy any steel surpluses towards exports. The company's export shipments surged in Q1 of fiscal 2021 when domestic demand was soft. Key export destinations included South East Asia, Southern Europe, the Middle East and China.

The confirmation of the ratings also reflects JSW's inherently strong operating profile, with credit metrics supportive of a higher rating prior to the pandemic. The outlook on the company's ratings was positive until March 2020, when it was changed to stable in anticipation of a slow recovery in credit metrics.

The rapid and widening spread of the coronavirus outbreak, deteriorating global economic outlook, falling oil prices and asset price declines are creating a severe and extensive credit shock across many sectors, regions and markets. The combined credit effects of these developments are unprecedented. The steel sector has been one of the sectors most significantly affected by the shock, given its sensitivity to consumer demand and sentiment.

More specifically, the weaknesses in JSW's credit profile, including its exposure to steel demand for manufacturing and volatile material costs, have left it vulnerable to shifts in market sentiment in the current unprecedented operating conditions, and it remains vulnerable to further disruptions caused by the ongoing pandemic.

Moody's regards the coronavirus outbreak as a social risk under its environmental, social and governance (ESG) framework, given the substantial implications for public health and safety. Today's action reflects the impact of the breadth and severity of the shock on JSW, and the broad deterioration in credit quality it has triggered.

The negative outlook reflects Moody's view that tougher economic conditions in JSW's key markets will likely stay for an extended period and that there are significant downside risks from the pandemic, which could delay the company's recovery. The outlook also incorporates Moody's expectation that JSW's credit profile will remain weak for a prolonged period, with no meaningful recovery anticipated at least over the next 18-24 months. 

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