Fitch Ratings has assigned JSW Steel (BB+/Stable) USD 500 million 4.75% senior unsecured notes due 2019 a final rating of 'BB+'. The final rating follows the receipt of documents conforming to information already received, and is in line with the expected rating assigned on 31 October 2014.
Proceeds of the notes will be used to prepay the company's rupee debt obligations. The notes will rank pari passu with the JSW Steel's existing and future senior unsecured indebtedness.
JSW Steel benefits from its low cost base due to its low conversion costs. The company's efficient operations are reflected in its strong profitability, with EBITDA margin of 17.9% in the financial year ended 31 March 2014 (FY14), 17% in FY13 and 19.9% in 1HFY15. Fitch expects JSW Steel's profitability to remain strong over the medium term because it will continue initiatives to reduce costs, with a focus on the Dolvi unit that was acquired when JSW ISPAT Limited merged with JSW Steel in June 2013.
The increasing share of value-added products in JSW Steel's revenue (33% in 2QFY15; as against 23% in 2QFY14) enhances its profitability. The company benefits from its association with JFE Steel Corporation (15% shareholder in JSW Steel), which provides access to technology to produce high value-added products. Fitch expects JSW Steel's profitability to improve as value-added products' share of revenue increases.
JSW Steel is the second-largest steel producer in India, with plants located in southern and western India, which drive its dominant market share in those regions. In addition JSW Steel's steel exports (26% of 2QFY15 volumes) provide some diversity of end markets.
Fitch expects JSW Steel's financial profile to improve over the near to medium term, supported by higher production volumes following expanded capacity and better profitability. The agency expects the JSW Steel's FFO-adjusted net leverage to fall to 3.5x by FY16.
JSW Steel's current financial profile is aggressive with FFO-adjusted net leverage of 4x in FY14 (FY13: 3.3x) and FFO interest cover of 3.6x (FY13: 3.9x). This is mainly driven by high debt levels following its merger with JSW ISPAT and capex for expanding capacity to 18 million tonnes per annum (mtpa) (FY14: 14.3mtpa) and improving its product profile. The large capex has resulted in negative free cash flows (FCF) over the last five years.
JSW Steel has minimal vertical integration for its key raw materials - iron ore and coking coal. This results in higher costs of purchasing these raw materials for JSW Steel compared with some of its steel peers. However, Fitch notes that the company's low conversion costs have mitigated this to a large extent. JSW Steel has also diversified its raw material sourcing to minimise the impact on operations from supply disruptions. This followed the challenges in sourcing iron ore during the last two years when iron ore mining was suspended in various states in India.
Fitch expects steel demand in India to increase in the next 12 months as investment in India picks up. Steel prices slid and squeezed the margins of steel producers over 2012-2013, when slower economic growth hurt demand from the key automobile, construction and engineering sectors.
Shares of the company declined Rs 10.7, or 0.86%, to trade at Rs 1,234.60. The total volume of shares traded was 39,653 at the BSE (1.39 p.m., Wednesday).
