Jindal Steel and Power Limited

Rating outlook revised to 'Negative'; ratings reaffirmed

Total Bank Loan Facilities Rated Rs.326380 Million (Enhanced from Rs.231880 Million) Long Term Rating CRISIL AA-/Negative (Outlook revised from 'Stable' and rating reaffirmed) Short Term Rating CRISIL A1+ (Reaffirmed)

(Refer to Annexure 1 for Facility-wise details)

Rs.32.12 Billion Non Convertible Debentures CRISIL AA-/Negative (Outlook revised from 'Stable' and rating reaffirmed) Rs.41.5 Billion Commercial Paper (Enhanced from 36.00 Billion) CRISIL A1+ (Reaffirmed)

CRISIL has revised its rating outlook on the long-term bank facilities and non-convertible debentures of Jindal Steel and Power Ltd (JSPL; part of the JSPL group) to 'Negative' from 'Stable', while reaffirming the rating at 'CRISIL AA-'; the rating on the company's short-term bank facilities and commercial paper facility has been reaffirmed at 'CRISIL A1+'.
 
The outlook revision reflects CRISIL's belief that weak demand for steel and low realisations could preclude improvement in the JSPL group's operating profits and delay a ramp-up of the group's recently commissioned steel plant at Angul (Odisha) and steel melting shop at Shadeed (Oman). These factors, along with high debt level and weak performance of overseas mining operations, could prolong the correction in the group's financial risk profile over the medium term.
 
CRISIL understands that JSPL group intends to monetise some of its assets and raise equity in its subsidiaries over the medium term, and will utilise the proceeds to reduce its debt. This will be a key rating sensitivity factor.
 
The ratings also factor in the government's disapproval of the JSPL group's bids for Gare Palma IV 2&3 and Tara mine for which the group had earlier emerged as the successful bidder. Although the matter is sub judice, CRISIL has not considered the availability of these mines in the JSPL group's assessment and will continue to monitor developments in this regard. Even if the JSPL group regains the mines, the benefits of raw material integration will accrue only over the long term as the group will need to enter into power purchase agreements (PPAs), and production from Tara mine will only commence over the next two years.
 
The ratings continue to reflect the JSPL group's healthy business risk profile, marked by its strong market position in the steel industry, the group's large and geographically diverse resource base, and its healthy financial flexibility driven by diversified and healthy cash flows. These rating strengths are partially offset by the JSPL group's high gearing, weighed down by its recently completed capital expenditure (capex). Furthermore, the group's steel business remains vulnerable to volatility in demand and in metal prices, while its power business is exposed to merchant price volatility and ongoing power evacuation issues; the group is also susceptible to regulatory challenges in the mining sector.
 
For arriving at its ratings, CRISIL has combined the business and financial risk profiles of JSPL and its subsidiaries. This is because all the entities, collectively referred to as the JSPL group, have operational and financial linkages.

CRISIL believes that weak demand for steel and low realisations could preclude improvement in the JSPL group's operating profits over the medium term. Furthermore, any delay in asset monetisation or raising equity in the subsidiaries could lead to continued pressure on the group's financial risk profile. The ratings may be downgraded if ramp-up in the group's Angul steel plant is significantly slow or if steel realisations decline further, thereby lowering operating profits. The ratings may also be downgraded in case of a delay in materialisation of the group's asset monetisation and equity-raising plans. Conversely, the outlook may be revised to 'Stable' in case of faster reduction in the JSPL group's debt or significant improvement in its operating performance.

The JSPL group, a part of the USD18-billion diversified OP Jindal group, is one of India's key steel producers, and has a sizeable presence in power generation and mining. The group operates the largest coal-based sponge iron plant in the world and has an installed capacity of 6.50 million tonnes per annum (mtpa) of steel: 3.00 mtpa at Raigarh (Chhattisgarh), 1.50 mtpa in Angul, and 2.00 mtpa in Shadeed.
 
JPL, a subsidiary of JSPL, set up India's first mega power project of 1000 MW in the private sector, and currently has a total commissioned power capacity of 2800 MW. Through its fully owned subsidiary, Jindal Steel & Power (Mauritius) Ltd (JSPML), JSPL acquired Shadeed Iron & Steel Company (Shadeed) in Oman, which has a 1.5-mtpa gas-based hot-briquetted iron plant, which is integrated forward to manufacture 2.0 mtpa of finished products. The JSPL group's international operations include interests in mining assets in resource-rich locations such as Australia, Indonesia in Asia, and Mozambique and South Africa in Africa.
 
The JSPL group undertook a large capex programme of around Rs.410 billion since 2011 for implementing a 1.5-mtpa greenfield integrated steel plant at Angul (under JSPL), 2400-MW power plants in two phases (2x600 MW each; in Tamnar [Chhattisgarh]; under JPL), a 2-mtpa billet cum round capacity in Shadeed (under JSPML), and for modernisation at Raigarh (under JSPL). The facilities of JSPL and JSPML were commissioned in 2014-15, along with 1800 MW of the proposed 2400-MW power plants under JPL.
 
On a consolidated basis, the JSPL group reported a profit after tax (PAT) of Rs.17.6 billion on an operating income of Rs.200.4 billion for 2013-14, as against a PAT of Rs.28.2 billion on an operating income of Rs.197.4 billion for 2012-13. For the nine months ended December 31, 2014, the JSPL group reported a net loss of Rs.8.73 billion on an operating income of Rs.148.75 billion, as against a PAT of Rs.15.15 billion on an operating income of Rs.143.87 billion for the corresponding period of the previous year.