TRUST CREDIT INSIGHTS JSW Steel Limited Detailed Report

Market statistics as on January 20, 2020 Credit Drivers: Stock price (Rs.) 271.4 Shares O/S (Bn) 2.42  Strong position in domestic ferrous industry: JSW Steel (JSTL) is one of Market Cap (Rs. Bn) 682.65 the largest players in domestic steel industry with 18mtpa production P/E (x) 8.89 capacity in . It is India’s fastest growing steel producer. JSTL is among 52 Week High(Rs.) 314.0 the most efficient low‐cost steel producers in India. 52 Week Low (Rs.) 201.7 Price/Book 1.95  Ongoing capex programs to improve cost efficiencies: JSTL has initiated a Shareholding pattern as on Dec 31, 2019 strategic capex plan towards augmenting the installed capacity, reducing Promoter & Promoter Group 42.3% costs, improving sales mix and value addition. Domestic Institutions 4.11%  Healthy cash flow generation but committed capex likely to keep debt Foreign Institutions 17.6% elevated: The ongoing capex would be funded at a project gearing of about Others 35.9% 1.4 times, and due to existing gearing levels, it is likely to result in *Promoters have pledged 32.5% shares elevated debt levels and keep its free cash flows under pressure in the JSW Steel vs. NIFTY medium term.

250.0  Recent acquisitions may drag profitability: JSTL acquired many companies in the last one year viz. Monnet Ispat and Bhushan Power in India and few 200.0 mills in the US and in Italy. Its steel assets in the US and Italy are yet to 150.0 achieve positive operating profits due to gradual ramp-up of its capacity 100.0 amid a weakening global demand for steel. 50.0  Management expertise & demonstrated execution capability: Capital cost 0.0 per tonne for JSTL’s past and ongoing capacity additions remains lower

than that of its industry peers. This, coupled with its demonstrated ability to

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NIFTY JSW STEEL LTD the company’s cost competitiveness.

Credit Rating History About the Company:

Long Term CARERating Outlook JSW Steel (JSTL) is the flagship company of O. P. Jindal JSW group with an

AA- AA- AA- AA-/Negative installed capacity of 18mtpa spread across three plants – (12mtpa), Tamil Nadu (1mtpa), and (5mtpa). JSTL is leading Indian integrated steel manufacturer. It is one of the most cost efficient producers of steel in India. Its capital discipline and ability to turn around loss-making operations is a differentiating factor. JSTL recently acquired Acero Junction, USA (1.5mtpa electric arc furnace and a 3mtpa hot‐strip mill) and Aferpi, Italy (2.5mtpa facility comprising a 320ktpa rail mill, a

FY 17 FY 18 FY19 FY20(YTD) 400ktpa bar mill, and a 600 ktpa wire‐rod mill). CARE

Industry Outlook: India is second largest steel producer in the world replacing Japan in 2018. Short Term Rating As primary producers in the domestic steel market ramp up their

A1+ A1+ A1+ A1+ production, coupled with a rise in imports and a fall in exports, availability of steel in the market to increase. Currently 17% (23Mt) of the domestic steel capacity is under consolidation. Post consolidation, ~65% (90Mt) of steel capacity will essentially be controlled by the top six players, who A1+ A1+ A1+ A1+ currently control 55% (78Mt) of the total supply. More than 10% of internal demand was met by imports in FY2019, as domestic prices remained

FY 17 FY 18 FY19 FY20(YTD) consistently higher than export prices.

CARE BWR Imports from FTA countries such as South Korea, Japan and Indonesia increased significantly due to zero duty, while Chinese exports to India Financial Performance Rs. Bn declined. Volatility in raw material supply for steel production continues to Particulars 1HFY20 1HFY19 % chg affect the profitability of steel sector unless pricing pressure gets moderate. Revenue 361.44 408.41 -11.50 EBITDA 64.47 100.11 -35.60 Supply volatility in domestic iron ore has also led to some price volatility, PAT 35.78 44.07 -18.81 which is in contrast to the international iron ore price trend. In the near EBITDA Margins 17.84 24.51 - term, there will also be some uncertainty surrounding the supply of (%) domestic iron ore, and as major non-captive mining leases lapse by March PAT Margins (%) 9.90 10.79 - 2020, there may be a shortage of iron ore post FY2020. The lapsing of

large mine capacity could potentially create a demand-supply imbalance in Source: Company Reports; As per INDAS wherever applicable iron ore. While global steel production and steel capacity has improved, global steel demand is likely to be muted in near term. However, the rising global protectionism could lead to some countries re-directing their imports from India. Unlike the US, the EU tariffs could be more worrying for Indian steelmakers, given that export volumes by Indian players to the EU are over five times of the volumes exported to the USA.

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Trust Credit Insights – JSW Steel Limited

Revenue and growth Key Credit Drivers: 900 40% Strong position in domestic ferrous industry: JSW Steel (JSTL) is one of the largest 34% 750 29% 30%

players in domestic steel industry with 18mtpa domestic production capacity . It is

India’s fastest growing steel producer as it started with its Karnataka plant and kept 600 18% 20% adding capacities over last two decades. JSTL acquired the Dolvi plant from debt- 450 10% laden Ispat Steel for Rs 21.6 billion in 2010 and then successfully expanded its capa city to 5mtpa. It is further doubling the capacity to 10mtpa at Dolvi. JSTL is 300 Rs. Billion 0% among the most efficient low‐cost steel producers in India. Majority of its cost 150 -12% -10% savings come from significantly lower labour costs, which is difficult for peers to 556 719 848 361 replicate. Dolvi plant’s proximity to the port and the Vijayanagar plant’s location in 0 -20% FY 17 FY 18 FY 19 1HFY 20 Bellary district of Karnataka with access to large iron ore deposits result in significant Revenue (LHS) Growth (RHS)

freight cost savings for JSTL.

Ongoing capex programs to improve cost efficiencies: JSTL has initiated a strategic EBITDA and PAT Margins capex plan of Rs487 billion through FY22 towards augmenting the installed capacity 21.9 22.4 20.6 to 24mtpa, reducing costs and improving sales mix. Apart from this, JSW is 17.8 expanding its downstream capacity by 3.95mtpa to improve value addition. JSTL is in the process of increasing its steelmaking and downstream capacities by 6 mtpa 9.9 and 3.95 mtpa respectively by FY22. While the steelmaking capacity addition would 8.4 8.9 provide increased economies of scale, additional downstream capacities would 6.2 increase the share of value-added products in the company’s sales mix. The ongoing capex also includes various cost-saving projects, such as setting up of pipe conveyors, a pellet plant, a captive power plant and a coke oven plant, which are Mar-17 Mar-18 Mar-19 Sep-19 likely to improve JSTL’s cost efficiencies further. EBITDA (%) PAT (%)

Healthy cash flow generation but committed capex likely to keep debt elevated: Networth and gearing JSTL ’s ability to generate healthy cash flows consistently is one of its primary 1.65 400 1.8 strengths.Strong parentage,However shared if global brand steel and scenario Board of deteriorateDirectors ands led management by slowdown support in 350 1.6 1.21 advanced economies, there can be significant pressure on JSTL’s balance sheet as 300 1.12 1.4 Mahindra Finance is a subsidiary of Mahindra & Mahindra Ltd. which has a 1.03 1.2 currentleadership debt levelsposition are in at the Rs412 tractors billion and. Apartutility fromvehicles the (UV) ongoing segment capex in programmeIndia. M&M 250 1.0 JSTL announced an additional capex Rs57. Billion in 1QFY20, which after accounting 200 has been supporting Mahindra Finance through shared ‘Mahindra’ brand as well 348.0 369.3 0.8 for the capex of Rs. 143.7 billion incurred in the last two years and the capex 150 280.0 Times as representation on Board of Directors as well as management support. The Rs. Billion 0.6 226.5 towardsBoard JSW of Directors Steel (Salav) of Mahindra Ltd being Finance kept on is hold,headed keeps by Mr. the Dhananjay capex commitment Mungale 100 0.4 large,(Non at- aboutExecutive Rs343.4 Chairman) billion overwho FY2020has vast-22. experience This pending in corporate capex would and investmen be fundedt 50 0.2 at abanking. project gearingThe operations of about of 1.4 the times, company similar are to headed the existing by Mr. gearing Ramesh levels, Iyer whobut is 0 0.0 Mar-17 Mar-18 Mar-19 Sep-19 likelythe to Vice result-Chairman in elevated and debtManaging levels Directorand keep and its freehas cashbeen flowswith Mahindraunder pressure Finance in Networth Gearing (inc Securitisation) the sincemedium inception term. in 1995. He is also member of the Group Executive Board of M&M (as President – Financial Services Sector) which explores synergies between all Manpower efficiency Acquisitionsthe businesses may drag and profitability formulates: JSTL strategic acquired plans.many companies Board of in MMFSL the last one has yearrepresentation – Monnet Ispat from and the Bhushan Mahindra Power group in byIndia Dr. and Anish mills Shah in the (Group US and President in Italy. – 80,000 4046 4500 ThoughStrategy all theseat M&M) will andcontribute Mr. V S significantly Parthasarathy in terms(Group of CFO volumes, and CIO how for quickly M&M). JSTL 70,000 4000

3500 can turn around these facilities towards profitability is questionable. Despite 60,000 2621 3000 reporting better capacity utilisation rates for its US-based plate and pipe mill in 50,000 2500 FY2019, the same remained low in absolute terms and resulted in loss making 40,000 72339 2000 30,000 operations at the net level. Its recently acquired steel assets in the US and Italy are 1500 Employees 20,000 646 Employees/t yet to achieve positive operating profits due to gradual ramp-up of its capacity amid 32984 1000 10,000 a weakening global demand for steel. Dependence of these overseas entities on the 12599 500 parent company to partly meet its debt servicing requirements affects the 0 0 JSTL TATA SAIL consolidated financial position of JSTL. No of employees Employee/mt

India’s low per capita consumption provides headroom for growth: India’s low per JSTL region wise capacity capita consumption of Steel compared to the developed economies provides (mtpa) significant headroom for growth. The construction sector accounts for over 60% of India's steel demand and has been the key driver of India's steel demand growth 5 over the past decades. The wide range of continuing infrastructure projects is likely to support growth in steel demand above 7-8% in next few years. A near term slowdown in new order inflows for construction companies from the road, bridge, 12 1 highway and irrigation segments may be offset by increased spending on affordable housing, urban metro rail, water supply and sewage, and railway projects. With the government's aid to real estate projects that are stuck because of last-mile funding, the upcoming quarters may witness an improvement in completion and availability of ready-to-move-in inventory. Vijayanagar Salem Dolvi

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Trust Credit Insights – JSW Steel Limited

Management expertise & demonstrated execution capability: JSTL has a balanced mix of executive and non executive independent directors. As at March 31, 2019 Interest Coverage Board of Directors comprises of 12 directors, of which 8 are non executive including 3 women directors. The Directors are professionals, possessing wide 4.84 experience and expertise in their areas of function – strategy, finance, governance 4.00 and legal, marketing, insurance, among others, which together with their collective 3.23 2.97 wisdom fuel JSTL’s growth. Capital cost per tonne for JSTL’s past and ongoing capacity additions remains lower than that of its peers. This, coupled with its demonstrated ability to execute capital projects within the stipulated timeframe and costs, adds to the company’s cost competitiveness. Mar-17 Mar-18 Mar-19 Sep-19 Int. Coverage (times) Adequate liquidity: JSTL’s consolidated debt repayments remain sizeable in

FY2020 at Rs121.7 billion, partly on account of maturity of its foreign currency bond and ECBs totalling to USD750 million. The company’s capex in FY2020 is expected to be about Rs157 billion, to be funded by debt of Rs100 billion and Z-score 1.59 Distress internal accruals of Rs57 billion. As on June 30, 2019, JSTL’s cash and cash Z > 2.99 - “Safe” Zones equivalents stood at Rs100.1billion, which included proceeds from customer advance of USD700 million availed from Duferco SA in March 2019 and funds 1.81< Z > 2.99 – “Grey” Zones raised through a forex bond issuance of USD500 million in April 2019. Free cash Z < 1.81 – “Distress” Zones available with the company, cash accruals from the business and undrawn term loans and working capital limits (to the extent of available drawing power) would be adequate to meet the capex and debt repayment requirements of JSTL in FY2020.

Company Management Name Designation Name Designation

Mrs. Savitri Devi Chairperson Emeritus Mr. Jayant Acharya Director (Commercial & Marketing), Non- Jindal Independent Executive Director Mr. Sajjan Jindal Chairman & Managing Director, Non- Mr. Hiroyuki Ogawa Nominee Director, JFE Steel Corpn, Japan Independent Executive Director Mr. Seshagiri Rao Joint MD & Group CFO, Non- Mr. Ganga Ram Nominee Director, KSIIDC M.V.S. Independent Executive Director Baderiya Dr. Vinod Nowal Deputy MD, Non-Independent Dr (Mrs) Punita Independent Non-Executive Director Executive Director Kumar Sinha

NCD & CP Issuances over 5 years Credit spread over 10 Year G-Sec: 9.38 9.49 8.62 8.77 8.72 8.19 8.37 8.16 7.91 8.10 7.80 8.02

8.10 8.14 7.34 7.49 7.26 6.99 6.81 6.87 6.97 6.80 20 6.39 6.62

FY 16 FY17 FY18 FY19 FY20 (YTD)

Q4FY17 Q1FY18 Q2FY18 Q3FY18 Q4FY18 Q1FY19 Q2FY19 Q3FY19 Q4FY19 Q1FY20 Q2FY20 NCD Quantum (Rs. Bn) CP Quantum (Rs. Bn) Q3FY20 JSW Steel Ltd G-SEC Source: NSDL, Prime Database Source: Thomson Reuters

Latest Issuance:

Quantum Name Type Date Tenor Coupon (%) (Rs. Bn) JSW Steel Limited Secured Debentures October 18, 2019 9 Year 11 Months 8.79 p.a. 20 Other Information: Auditors M/s. S R B C & Co LLP Chartered Accountants

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Trust Credit Insights – JSW Steel Limited

Financials: (Consolidated as per IND AS)

Profit & Loss Statement Particulars (in Bn) FY17 FY18 FY19 Balance Sheet INCOME : Particulars (in Bn) FY17 FY18 FY19 Gross Sales 1026.31 1158.20 1305.42 EQUITY AND LIABILITIES Net Sales 1001.84 1151.83 1305.42 Share Capital 2.23 2.23 2.22 EXPENDITURE : 0.00 0.00 0.00 Shareholder's Funds 460.59 548.52 575.02 Increase/Decrease in Stock -28.29 -19.91 3.86 Long-Term Borrowings 518.55 478.74 480.32 Raw Material Consumed 584.87 708.76 783.02 Other Non-current liabilities 100.61 115.18 125.47 Power & Fuel Cost 85.23 86.14 96.18 Total Non-Current Liabilities 619.16 593.93 605.79 Employee Cost 85.46 86.45 90.43 Current Liabilities 0.00 0.00 0.00 Other Manufacturing Expenses 50.19 49.64 54.85 Trade Payables 174.63 204.05 207.23 General and Administration Expenses 7.23 6.71 6.57 Other Current Liabilities 114.87 58.92 55.00 Selling and Distribution Expenses 32.51 34.55 44.87 Short Term Borrowings 65.96 33.98 42.26 Miscellaneous Expenses 61.00 65.60 74.01 Short Term Provisions 26.17 30.66 32.91 Less: Expenses Capitalized 0.00 0.00 0.00 Total Current Liabilities 381.64 327.61 337.39 Total Expenditure 878.21 1017.94 1153.79 Total Liabilities 1461.44 1470.14 1518.29 Operating Profit (Excl OI) 123.62 133.89 151.64 ASSETS 0.00 0.00 0.00 Other Income 11.96 16.36 14.63 Non-Current Assets 0.00 0.00 0.00 Operating Profit 135.59 150.25 166.27 Net Block 846.63 850.65 858.36 Interest 57.42 39.11 37.78 Capital Work in Progress 17.41 19.83 39.75 PBDT 78.16 111.14 128.49 Other Fixed Assets 0.73 0.80 1.22 Depreciation 44.69 46.06 47.66 Non Current Investments 62.30 69.02 51.80 Profit Before Taxation & Exceptional 33.48 65.08 80.83 Long Term Loans & Advances 22.69 18.49 11.82 Items Other Non-Current Assets 10.55 11.72 15.40 Profit Before Tax 33.40 82.82 80.83 Total Non-Current Assets 960.30 970.51 978.35 Provision for Tax 14.33 20.74 25.88 Current Assets - Loans & Advances 0.00 0.00 0.00 Profit After Tax 19.07 62.08 54.95 Currents Investments 89.52 39.03 38.55 Inventories 182.91 216.31 221.94 Key Ratios Sundry Debtors 82.75 99.60 114.60 Particulars FY17 FY18 FY19 Cash and Bank 82.61 80.58 97.87 Other Current Assets 52.23 47.38 39.24 Operational & Financial Ratios Short Term Loans and Advances 11.12 16.72 27.75 Earnings Per Share (Rs) 8.53 27.29 24.71 Total Current Assets 501.14 499.63 539.94 DPS(Rs) 1.10 1.20 1.20 Miscellaneous Expenses not written 0.00 0.00 0.00 Book Value (Rs) 206.66 246.04 259.04 off Margin Ratios Total Assets 1461.44 1470.14 1518.29 PBIDTM (%) 13.21 12.97 12.74 Total Debt (Long Term Plus Short 638.17 520.74 524.15 PATM (%) 1.86 5.36 4.21 Term) Performance Ratios

ROA (%) 1.33 4.24 3.68 ROE (%) 4.41 12.31 9.77 Cash flow Statement ROCE (%) 8.33 11.25 10.94 Particulars (in Bn) FY17 FY18 FY19 Efficiency Ratios Profit Before Tax 33.40 82.82 80.83 Receivable days 28.79 28.73 29.94 Adjustment 97.38 58.10 74.72 Inventory Days 62.38 62.91 61.27 Changes In working Capital 3.89 -12.72 -16.87 Payable days 68.95 69.34 67.17 Cash Flow after changes in Working 134.67 128.21 138.68 Growth Ratio Capital Net Sales Growth(%) 1.44 14.97 13.33 Interest Paid 0.00 0.00 0.00 Core EBITDA Growth(%) 37.75 10.81 10.66 Tax Paid -7.80 -19.23 -18.88 PAT Growth(%) 318.48 225.46 -11.49 Other Direct Expenses paid 0.00 0.00 0.00 Financial Stability Ratios Extra & Other Item 0.00 0.00 0.00 Total Debt/Equity(x) 1.39 0.95 0.91 Cash From Operating Activities 126.87 108.98 119.80 Current Ratio(x) 1.31 1.53 1.60 Cash Flow from Investing Activities -27.89 50.26 -56.52 Quick Ratio(x) 0.83 0.86 0.94 Cash from Financing Activities -55.52 -164.12 -54.61 Interest Coverage Ratio 1.58 3.12 3.14 Net Cash Inflow / Outflow 43.47 -4.89 8.67 Opening Cash & Cash Equivalents 42.62 82.22 80.41 Peer Comparison as on March 31, 2019 Cash & Cash Equivalent on -2.99 0.00 0.00 Amalgamation / Take over / Merger Particulars (in Bn) JSTL TATA SAIL Cash & Cash Equivalent of Subsidiaries 0.00 0.00 0.00 Total Income 1410.07 26.99 22.40 under liquidations PAT 102.38 3.73 4.82 0.00 0.00 0.00 Equity 2.81 3.16 2.00 Translation adj. on reserves / op cash Debt 1255.55 0.0 0.48 balances frgn subsidiaries EBITDA margin (%) 18.39 24.20 37.55 Effect of Foreign Exchange Fluctuations -0.87 3.08 1.92 ROE (%) 17.56 15.91 20.78 Closing Cash & Cash Equivalent 82.22 80.41 91.00 ROA (%) 3.96 7.53 9.19 Leverage (times) 2.0 0.0 0.01 Information Source: Ace Equity, Company Reports, IBEF, NSDL, Prime Database, Bloomberg, Thomson Reuters, Rating Agencies, CRISIL Disclaimer: This report is for personal information of the selected recipient/s and does not construe to be any investment, legal or taxation advice to you. This report does not constitute an offer, invitation or inducement to invest in securities or other financial instruments and Trust Investment Advisors Private Limited (TIAPL) is not soliciting any action based upon it. This report is not for public distribution and has been furnished to you solely for your general information and should not be reproduced or redistributed to any other person in any form. This report does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. Before acting on any advice or recommendation in this material, investors should consider whether it is suitable for their particular circumstances and, if necessary, seek professional advice. The information contained herein is from publicly available data or other sources believed to be reliable, but we do not represent that it is accurate or complete and it should not be relied on as such. TIAPL accepts no liability for loss arising from the use of the material presented in this report. We and our affiliates, officers, directors, and employees may: (a) from time to time, have long or short positions in, and buy or sell the securities thereof, of company (ies) mentioned herein or (b) be engaged in any other transaction involving such securities and earn fess/commission/brokerage or other compensation or act as advisor or lender / borrower to such company (ies) or have other potential conflict of interest with respect to any analysis/recommendation/related information and opinions. Regional Disclosures (outside India): This report is not directed or intended for distribution to or use by any person or entity resident in a state, country or any jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject TIAPL or its associate/subsidiary companies to registration or licensing requirements within such jurisdictions.

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