Even prior to the coronavirus
outbreak, sluggish economic growth, weak demand and narrow product spreads had led to a deterioration in JSW's credit profile, Moody’s said.
Moody's regards the coronavirus
outbreak as a social risk under its ESG framework, given the substantial implications on public health and safety.
The rating action reflects the breadth and severity of the impact on JSW, and the deterioration in credit quality it has triggered.
In March, JSW said that following the nationwide lockdown and the various advisories, production at most of its plants had either been scaled down or suspended.
"The review for downgrade reflects the expectation that weak steel demand will strain JSW's credit profile, at least through the fiscal year ending March 2021," said Moody's Vice President and Senior Credit Officer Kaustubh Chaubal.
"In fact, there is a distinct possibility JSW will remain in breach of our downgrade triggers for its Ba2 CFR," Moody’s added.
Moody's review will focus on the impact of the outbreak on JSW's operations in the light of increasing restrictions on people's movement and the potential for a further shutdown of operations to ensure employee safety. The review will also look at the impact the outbreak has on demand, steel prices and product spreads.
The rating agency would conduct an analysis of JSW's asset base, cost structure, likely cash burn rate and liquidity, as well as management's strategy for coping with prolonged, low and volatile commodity prices, it added.
Profitability, measured in terms of Ebitda per tonne, for company’s domestic steel operations declined by 30 per cent during the nine months ended December 2019 to Rs 8,168 from Rs 11,677 in fiscal 2019.
"The review reflects our concern that JSW will face significant challenges due to the coronavirus-led economic downturn, with declining sales, weak earnings and free cash flow generation because of tepid demand from automakers, manufacturing and other steel consuming industries," Chaubal added.
Moody's expects to conclude the review within 90 days.
Given the current market situation, an upgrade of JSW's ratings is unlikely in the near term. However, the outlook could return to stable if improved market conditions lead to a recovery in metrics to pre-outbreak levels.