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 India. 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 15-Jul-17 15-Jul-18 15-Jul-19 15-Jan-17 15-Jan-18 15-Jan-19 15-Jan-20 15-Sep-19 15-Sep-17 15-Sep-18 15-Nov-17 15-Nov-18 15-Nov-19 15-Mar-18 15-Mar-17 15-Mar-19 15-May-19 15-May-18 15-May-17 execute capital projects within the stipulated timeframe and costs, adds to 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 – Karnataka (12mtpa), Tamil Nadu (1mtpa), and Maharashtra (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. Connect : [email protected] January 2020 Industry: Metals 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% players in domestic steel industry with 18mtpa domestic production capacity . It is 750 29% 30% 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 300Rs. Billion 0% capa city to 5mtpa. It is further doubling the capacity to 10mtpa at Dolvi. JSTL is 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 sharedif 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 DirectorsSteel (Salav) of Mahindra Ltd being Finance kept onis hold,headed keeps by Mr.the Dhananjaycapex 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 companiesBoard of in MMFSLthe last onehas yearrepresentation – Monnet Ispat from and the Bhushan Mahindra Power group in byIndia Dr.