Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AA-/Stable/CRISIL A1+’ ratings on the bank facilities of Jindal Stainless (Hisar) Ltd (JSHL). The Jindal Stainless group includes Jindal Stainless Ltd (JSL: CRISIL AA-/Stable/CRISIL A1+), JSHL and their subsidiaries.

 

The ratings continue to factor in the healthy business risk profile of the Jindal Stainless group, driven by its market leadership in the domestic stainless steel (SS) industry, both in terms of manufacturing capacity and sales volume, efficient operations and its sizeable export presence. With a combined steel melting capacity of nearly 1.9 million tonne per annum (MTPA), the group is among the top 10 SS manufacturers globally. The ratings also factor in the healthy financial risk profile of the group, led by strong liquidity. 

 

These strengths are partially offset by susceptibility of profitability to volatility in input cost and realisations and to cyclicality in the SS industry. The group also faces competition from cheaper Indonesian and Chinese imports. Substantial increase in imports may adversely impact realisations and volume, and hence, remains a key monitorable.

 

CRISIL Ratings takes note of the recent announcement made by JSL, on July 25, 2022, on acquisition of the balance 74% stake in Jindal United Steel Ltd (JUSL), an associate entity (JSL currently has 26% stake), for a total consideration of Rs 958 crore. CRISIL Ratings understands that the transaction should be completed by the first quarter of fiscal 2024 and will be primarily funded by internal accrual. 

 

JUSL has been operating a hot strip mill (HSM), in the same location as that of JSL’s Odisha plant. It undertakes rolling of SS slabs produced by JSL on a tolling basis and has a capacity of 1.6 MTPA (as on date). It also has a cold rolling mill (CRM) with capacity of 0.2 MTPA for SS applications. JUSL is also expanding its HSM capacity to 3.6 MTPA, at a cost of Rs 400-500 crore. Given the integrated nature of operations between JSL and JUSL, CRISIL Ratings understands that acquisition of the entire stake in JUSL should offer synergistic benefits and facilitate better integration of manufacturing facilities. While the acquisition will result in an increase in consolidated debt of the group, this should be supported by additional earnings from the acquisition. Further, JUSL does not have any significant debt repayment obligations till fiscal 2028 which will support the liquidity and cash flows. Hence, the acquisition is not expected to materially alter the credit profile of the Jindal Stainless group.

 

Further, the group is undertaking capital expenditure (capex) to increase its SS melting capacity by 1 MTPA, along with higher downstream capacities*, supporting infrastructure and for improving cost efficiency. The group has taken necessary credit lines to support the capex (including letter of credit requirement). Having said that, CRISIL Ratings understands that the planned capex, along with acquisition of JUSL will be mainly funded through internal accruals. However, any significant debt-funded capex or acquisition will remain a key monitorable.

 

*Downstream capacities being expanded include hot-rolled annealed and pickled capacity – to increase 1.6 times to 1.25 MTPA, CRAP (cold-rolled annealed and pickled) – 1.7 times to 0.75 MTPA, precision strip – 3 times to 0.06 MTPA, and blade steel – 1.7 times to 0.02 MTPA.

Analytical Approach

To arrive at the ratings, CRISIL Ratings has applied its criteria for rating entities in homogenous groups and combined the business and financial risk profiles of JSL, JSHL and their subsidiaries. The entities, collectively referred to as the Jindal Stainless group, are largely in the same line of business with strong business and financial linkages and common promoters. Also, JSHL has extended cash support to JSL and there exists a structure where JSL and JSHL have issued corporate guarantees for the debt facilities of each other.

 

JSHL and JSL are in the process of a merger, with approvals received from respective boards, shareholders and creditors, and stock exchanges (National Stock Exchange of India Ltd and BSE Ltd), and scheme of merger filed with the Honorable National Company Law Tribunal.

 

Please refer Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths

• Superior market position coupled with a sizeable export presence

The group — through its manufacturing plants in Hisar, Haryana (JSHL plant with capacity of 0.8 MTPA); and Jajpur, Odisha, (JSL plant with 1.1 MTPA) — is the largest manufacturer of SS flat products in India. Capabilities to manufacture a wide variety of grades across all series of SS (mainly 200, 300 and 400 series —classified based on exact content of nickel and other alloys) — helps the group cater to a diversified end-user base comprising automobile-railway-transportation (ART), architecture-building-construction (ABC), process industries (food and pharmaceuticals), consumer goods (durables, kitchenware) and healthcare (equipment). The two plants have well-defined target geographies (the Haryana plant focusses on the northern and western markets while the Odisha plant focusses on the southern and eastern markets) and product segments (the Hisar plant focusses on valued-added products such as SS blades used in razors and coin blanks for national and foreign mints, while the Odisha plant is focused on mass products).

 

The capex announced by the group includes increasing SS melt capacity to 2.1 MTPA in the Odisha plant, which will further consolidate its market position. It is also adding downstream capacities in both plants, along with capex to improve cost efficiency. Further, acquisition of the HSM plant of JUSL should yield synergistic benefits from integrated operations (JUSL generated Ebitda of Rs 592 crore in fiscal 2022).

 

Together, the plants exported nearly 21% of their combined output in fiscal 2022, with Europe, South-East Asia and the Middle East being the key markets. Post imposition of the 15% duty on steel and SS exports in May 2022, the group saw its share of exports fall to 22% in the first quarter of fiscal 2023, compared to 26% in the fourth quarter of fiscal 2022. Going forward, while share of exports may fall, compared to fiscal 2022 levels, the same is expected to remain sizeable.

 

• Margin to sustain at healthy levels despite fall in exports

In fiscal 2022, healthy demand and, increased focus on higher grades and exports led to better product mix that aided profitability despite higher input prices. This, along with positive inventory valuation and cost efficiency measures, led to Ebitda per tonne of about Rs 30,000, which was significantly higher than around Rs 19,000 seen in fiscal 2021. Going forward, while margins levels are expected to moderate, with fall in realisations and exports, CRISIL Ratings expects the group to generate Ebitda per tonne of around Rs 18,000-20,000 on a sustained basis.

 

While profitability is largely dependent on the prices of inputs (mainly nickel and chrome ore) and product mix (200, 300, 400 series), the group has undertaken several measures to improve its operating performance. The JSL plant has installed a railway siding and inland container depot (ICD) to transport raw material and finished goods, leading to savings on logistic cost, and has substituted high-cost propane with cheaper coke oven gas. Furthermore, the JSL plant is in Odisha, which has 93% of India’s chromite ore reserves (apart from nickel, chrome is a key input in making SS). The captive 264-megawatt (MW) power plant meets bulk of the electricity requirement. Further, the group also has flexibility to shift production to SS series with lower nickel content (such as 400 and 200 series) depending on market conditions, which enhances sustainability of operations.

 

• Significant improvement in financial risk profile backed by debt reduction

Aided by healthy operating performance, JSL reduced consolidated external debt to Rs 2,435 crore as on June 30, 2022, from Rs 3,488 crore as on March 31, 2019. JSHL also pared its consolidated debt to Rs 1,531 crore from Rs 2,367 crore, over the same period. CRISIL Ratings understands the group reduced debt in such a way that bulk of the scheduled term debt obligation over the next two fiscals, has already been paid and payment of only about Rs 84 crore is scheduled till end of fiscal 2023. Going forward, leverage levels are expected to increase compared to fiscal 2022. However, the same will remain comfortable as the ongoing capex and acquisition of JUSL stake are to be primarily funded through internal accrual.

 

• Prudent working capital management

Improving scale provided the group better bargaining power with suppliers and customers. Receivables have been under 40 days over the past four fiscals, with payables at 75-90 days. The group has taken several steps to minimise inventory, especially that of nickel (the costliest raw material), through regular monitoring to minimise any impact of price volatility. It also maintains a healthy order book to better manage pricing risk.

Weaknesses

• Threat from imports

While the Jindal Stainless group is the largest SS player in India, it faces competition from imports mainly from Indonesia, which is a low-cost producer of SS as it has nickel deposits (main input for 300 series SS), and China. Sharp rise in imports from Indonesia in fiscal 2020 put pressure on the margins and volumes of domestic players. The countervailing duty (CVD) imposed on Indonesian imports by the Government of India in August 2020, was rescinded during the Union Budget for fiscal 2022. In the Union Budget for fiscal 2023, the government revoked certain anti-dumping duties and CVD on SS products to contain their prevailing high prices. Even though imports are likely to be largely limited to the 200 and 300 series (which has high nickel content, a resource not available in India), any significant rise in imports can adversely impact realisation and volume of domestic players and thus, remains a key monitorable.

 

• Susceptibility to risks relating to input cost, realisations and cyclicality in the SS industry

Prices of key raw materials such as SS scrap and finished SS products are largely linked to nickel prices, which tend to be highly volatile. This has led to unfavourable price cycles for the sector in the past. Moreover, as certain amount of nickel is always maintained as inventory, price fluctuations led to inventory gains or losses in the past and thus, remain a key monitorable. The group has taken several steps to gain ability to pass on input price increases, including tie-ups with original equipment manufacturers in the automotive, lifts and other industrial segments, with pass-through clauses in contracts. It has also entered into volume-based tie-ups with distributors where pricing is set on a periodic basis. However, the ability to pass on the full impact of price hikes will also depend on the underlying demand scenario. Resultantly, the increase in nickel prices over the past few quarters may impact volume of SS grades with high nickel content as their prices move in tandem. While the group has the ability to shift between various grades of SS, impact of the elevated nickel prices on volume will be a key monitorable in the near term.

Liquidity: Strong

Liquidity is backed by expected net cash accrual of Rs 2,300-2,500 crore for fiscals 2023 and 2024, sufficient to meet yearly principal debt obligation (for JSL and JSHL at standalone level) of around Rs 150 crore for fiscal 2023 and around Rs 450 crore for fiscal 2024. Liquidity is further supported by unutilised fund-based limit of Rs 252 crore (on drawing power) in JSL (against total sanctioned fund-based limit of Rs 600 crore) and Rs 338 crore in JSHL (against Rs 550 crore), and cash and equivalent of Rs 280 crore as on August 31, 2022. Additionally, JSL has unutilised term loan limits (sanctioned for capex) of Rs 2,388 crore (of assessed limit of Rs 2,800 crore), as on August 31, 2022. Unutilised non-fund-based-limits stood at Rs 3,024 crore in JSL (against sanctioned limits of Rs 6,100 crore) and Rs 687 crore in JSHL (against Rs 2,000 crore), as on August 31, 2022. Healthy cash flow, absence of any significant term debt obligation over the next two fiscals and unutilised working capital and term loan limit, should comfortably cover any incremental working capital requirement and capacity expansion plans.

Outlook Stable

The Jindal Stainless group is likely to sustain its healthy operating performance over the medium term, aided by healthy demand for SS. Absence of any significant term debt obligation and healthy cashflows over the next two fiscals should help sustain the financial risk profile.

Rating Sensitivity factors

Upward factors

• Sustained improvement in profitability with Ebitda per tonne reasonably higher than the current expectation of Rs 20,000 per tonne
• Further reduction in debt, aided by stable profitability and healthy cash accrual

 

Downward scenario

• Weakening of profitability with Ebitda per tonne lower than Rs 16,000 per tonne on a sustained basis
• Lower-than-expected cash accrual or significant debt-funded capex or acquisition, leading to a sharp increase in leverage ratio

About the Group

JSL, a listed entity, is one of the largest SS manufacturers in India, with steel melting capacity of 1.1 MTPA. Its plant in Jajpur is supported by a captive power plant of 264 MW, ferroalloy plant of 0.25 MTPA, and CRAP plant of 0.45 MTPA. Operations are supported by 1.6 MTPA hot strip mill owned by associate company, JSUL (26% owned by JSL currently). JUSL converts SS slabs produced by JSL into hot-rolled coils, while the coke oven plant owned by another associate entity, Jindal Coke Ltd (26% owned by JSL), supplies JSL with coke and coke oven gas. JSL is acquiring the remaining 74% stake in JUSL for a total consideration of Rs 958 crore. JSHL owns 32.02% of equity in JSL (as on June 30, 2022).

 

JSHL, a listed entity, has a 0.8 MTPA SS plant in Hisar. It procures ferrochrome from JSL as well as from the open market. Its plant is the largest manufacturer of SS blades, used in razors, globally. The company also manufacturers various grades of speciality SS products.

 

In fiscal 2020, JSL exited the corporate debt restructuring process by redeeming Rs 558 crore of optionally convertible redeemable preference shares held by its lenders and additionally paying the entire recompense liability of Rs 275 crore. The company further redeemed secured redeemable non-convertible debentures, outstanding at around Rs 52 crore in January 2021, ahead of scheduled maturity of these instruments

Key Financial Indicators – JSHL consolidated – CRISIL Ratings-adjusted numbers

As on / for the period ended March 31	Unit	2022	2021
Operating income	Rs crore	15,004	9,400
Adjusted PAT	Rs crore	1,947	696
Adjusted PAT margin	%	13.0	7.4
Adjusted debt/ adjusted networth	Times	0.38	0.51
Interest coverage*	Times	20.6	5.1

*Adjusted for interest income on ICD given to JSL

 

Key financial indicators – JSL consolidated – CRISIL Ratings-adjusted numbers

As on / for the period ended March 31	Unit	2022	2021
Operating income	Rs crore	21,248	12,205
Adjusted profit after tax (PAT)	Rs crore	1,909	419
Adjusted PAT margin	%	9.0	3.4
Adjusted debt/adjusted networth	Times	0.60	0.99
Interest coverage*	Times	13.3	3.8

*Adjusted for interest expense on intercorporate deposit (ICD) from JSHL

Any other information: Not applicable