JSW Steel Limited. August 29, Previous Rated Amount Current Rated Amount (Rs. crore) Rating Action Term Loans / Standby Letter of Credit

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1 Summary of rated instruments JSW Steel Limited August 29, 2018 Instrument* Previous Rated Amount Current Rated Amount Rating Action Term Loans / Standby Letter of Credit Facilities from (Stable) Proposed Term Loans from (Stable) Short-term Fund-based Limits [ICRA]A1+; Reaffirmed Short-term Non-fund Based Limits [ICRA]A1+; Reaffirmed Long-term / Short Term Fundbased/Non-fund Based Limits from /[ICRA]A1+ reaffirmed Non-convertible Debenture Programme from (Stable) Proposed Non-convertible Debenture Programme from (Stable) Commercial Paper Programme [ICRA]A1+; Reaffirmed Total *Instrument details are provided in Annexure-1 Rating action ICRA has revised the long-term rating to the Rs. 3, crore 1 (reduced from Rs. 5, crore) non-convertible debenture (NCD) programme and the Rs. 24, crore (enhanced from Rs. 22, crore) term loans / standby Letter of Credit facilities of JSW Steel Limited (JSW Steel) to [ICRA]AA (pronounced ICRA double A) from (pronounced as ICRA double A minus) 2. ICRA has also revised the long-term rating to the Rs. 5, crore proposed term loans and the Rs. 2, crore proposed NCD programme of JSW Steel to [ICRA]AA from. The outlook on the long-term rating is Stable. ICRA has reaffirmed the [ICRA]A1+ (pronounced ICRA A one plus) rating to the Rs. 5, crore commercial paper (CP) programme, the Rs. 1, crore fund-based bank facilities and the Rs. 19, crore (enhanced from Rs. 16, crore) non-fund based bank facilities of JSW Steel. ICRA has also revised the long-term rating to [ICRA]AA(Stable) from (Stable) and reaffirmed the short-term rating at [ICRA]A1+ for the Rs. 5, crore long term/short term, fund-based/non-fund based bank facilities of JSW Steel. Rationale The upgrade, in JSW Steel s long-term rating, takes into account a sustained improvement in the company s operating and financial performance on the back of favourable demand and remunerative steel prices, a trend which ICRA expects is likely to persist in the near-to-medium term. The company is in the process of enhancing its installed capacities of steel-making and downstream facilities by 6.7 million tonne per annum (mtpa) and 3.2 mtpa respectively at competitive capital costs over the next three years, which would not only increase the share of the value-added products in the lakh = 1 crore = 10 million 2 For complete rating scale and definitions, please refer to ICRA's website or other ICRA Rating Publications 1

2 company s sales mix, but also improve its cost efficiencies further. The company is also widening its footprint in the US market with an acquisition of a 1.5 mtpa (with potential to expand upto 3 mtpa) flat steel-manufacturing facility in Ohio and an upgradation of the existing plate and pipe mill in Texas which, coupled with a recent acquisition of a 1.32 mtpa long steel-manufacturing facility in Italy, would diversify its geographical presence. The ratings also favourably factor in the status of JSW Steel as the largest steel producer in India with a strong market position in western and southern India, and its position of being the largest Indian exporter of steel. Though the company has limited vertical integration in the form of captive raw material sources, ICRA notes that JSW Steel has been able to maintain healthy operating profitability during the last few years, which can be attributed to the efficient and technologically-advanced operations of the company, which keep conversion costs low. ICRA also takes note of JSW Steel s demonstrated ability to execute various capacity expansion and cost-optimisation programmes within the stipulated time and budget. In addition, it considers the location advantages resulting from the proximity of the Vijaynagar plant to the iron ore mines and the Dolvi plant to a port, which results in freight cost savings to an extent. The ratings, however, factor in the company s exposure to price risks and supply uncertainties in the absence of captive sources of raw materials. Sharp volatility in coking coal prices in the recent past accentuates such price risks. Although two of the five category C mines allocated to the company recently started operations and the balance three mines are likely to be commissioned before the end of the current fiscal, these would cater to only a small portion of the company s overall iron ore requirements. Nevertheless, these mines, along with a coking coal block allotted in Jharkhand, are expected to improve JSW Steel s raw material security in the medium term. ICRA also notes that the company has announced an additional capex of about Rs. 17,561-crore over and above the previously announced capex programme of Rs. 26,815-crore, which would be incurred over the next three years. The total capex of Rs. 44,376 crores is to be part-funded by a fresh debt of Rs. 25,000-crore. Additionally, the company s aggressive inorganic growth strategy with the acquisition of the US and the Italy-based steel assets and its status as a joint venture partner in the special purpose vehicle (SPV), which acquired Monnet Ispat and Energy Limited under the Insolvency and Bankruptcy Code (IBC) framework, are likely to keep JSW s overall debt levels elevated and exert pressure on its free cash flows over the medium term. The company would also remain exposed to business integration and off-take risks specific to these acquisitions, especially in the overseas markets. While JSW has also evinced interest in the acquisition of additional stressed steel assets in India under the IBC framework, the company's strategy of partnering reputed private equity funds for acquisition of such assets would keep its borrowing requirements for funding such inorganic growth low. ICRA also notes that JSW Steel remains exposed to forex risks due to its dependence on imports to meet its coking coal requirements, and the fact that about 39% of the company s standalone total debt as on March 31, 2018 was denominated in foreign currency. However, the forex risks are largely mitigated by its formal hedging policy to fully cover its revenue account and next one year s debt service obligations, and inherent linkage of steel realisations with foreign exchange rates. Notwithstanding an improvement in demand conditions in the US market, weak financial profiles of the company s overseas subsidiary, viz. JSW Steel (USA) Inc. and Santa Fe Mining (Chile) due to sub-optimal capacity utilisation and unfavourable iron ore prices, respectively, adversely impact the consolidated financial position of JSW Steel. The cyclicality associated with the steel industry, causing variability in the players profits and cash accruals, also impact the company s ratings. Outlook: Stable ICRA believes that JSW will continue to benefit from improved domestic demand and supportive steel realisations in the short to medium term. The outlook may be revised to Positive if sustained improvement in operating performance results in a significant improvement in the consolidated entity s capital structure and coverage indicators. The outlook may be revised to Negative if the company s investment commitments or acquisition appetite exceeds ICRA s expectations and leads to an increase in its leverage. 2

3 Key rating drivers Credit strengths Strong operating performance in FY2018, a trend likely to continue On the back of favourable demand and realisations, JSW s consolidated operating income grew at a healthy rate of 26% in FY2018. JSW s standalone domestic realisations improved by 17% in FY2018 and are expected to inch up further in the current year, which, coupled with healthy domestic demand from the key steel-consuming industries including automobiles and construction, would support its revenue growth in the near to medium term. JSW s consolidated operating profitability too remained healthy at 21.1% in FY2018. In addition to supportive realisations, the company s operating profitability would be further supported by operationalisation of iron ore mines and various projects, including digitisation initiatives and pipe conveyors to transport iron ore from mines to the plant in Vijayanagar. Healthy operating margin and an improvement in capacity utilisation to about 90% in FY2018 resulted in an improvement in consolidated return on capital employed to 17.8% from 15.0% in FY2017. On the back of healthy accruals, the company s consolidated gearing reduced to 1.43 time as on March 31, 2018 from 1.93 time as on March 31, 2017, while strong operating profitability resulted in better coverage indicators in FY2018, as reflected by an interest coverage of 4.0 time (3. 23 time in FY2017) and total debt to operating profit of 2.66 time (3.56 time in FY2017). Large ongoing capacity expansion programmes increasing the extent of value-added products in the sales mix and further improving its cost efficiency JSW is in the process of increasing its installed and downstream capacities by 6.7 mtpa and 3.2 mtpa respectively by the end of FY2020. While the installed capacity addition would provide increased economies of scale, additional downstream capacities would increase the share of value-added products in the company s sales mix. The ongoing capex also includes various cost-saving projects, including setting up of pipe conveyors, a pellet plant, a captive power plant and a coke oven plant, which are likely to improve JSW s cost efficiencies further. Widening footprint in the US market, acquisition of Cevitaly s steel asset in Italy to diversify its geographic presence In the current year, the company announced the acquisition of US-based Acero Junction, which has a flat steelmanufacturing facility of 1.5 mtpa (with potential to expand upto 3 mtpa) capacity in Ohio. JSW is also planning to execute various capacity modernisation and backward integration projects at its Texas plate and pipe mill in multiple phases. In the current fiscal, JSW also announced the acquisition of a 1.32-mtpa long steel-making facility of Italy-based company Cevitaly, which has no backward integration facility at present. These recent acquisitions are likely to augment and diversify JSW s revenue stream, while the capacity upgradation and backward integration projects in the US are expected to improve its profitability going forward. Status of being the largest steel producer in India and one of the largest Indian exporters of steel with healthy market position in western and southern India With crude steel production of mt in FY2018, JSW remained the largest steel producer in India and also remained the largest steel exporter with exports of 3.64 mt during the year. The company s diverse product portfolio comprising flat and long products, a high share of value-added & special products (VASP) and special products in the sales mix (58% of total sales) and strong distribution network with significant retail presence also help it achieve a leading market position in western and southern India, where its manufacturing facilities are located. Location advantages - JSW s Dolvi plant s proximity to the port and the Vijayanagar plant s location in Bellary district of Karnataka with access to large iron ore deposits, both result in significant freight cost savings for the company. 3

4 Demonstrated capability to execute capital expansion at a significantly lower cost than peers Capital cost per tonne for JSW s past and ongoing capacity additions remains significantly lower than that of its peers, which, coupled with its demonstrated ability to execute capital projects within the stipulated timeframe and costs, adds to the company s costcompetitiveness. Credit challenges Limited captive sources of raw materials at present expose the company to price and supply risks Although two of the five category C mines of JSW have recently started operations and the balance three are likely to commence mining by the end of this fiscal, the same would meet only about 20% of the company s iron ore requirements at Vijayanagar works. The company also remains dependent on imports of coking coal, the prices of which have witnessed significant volatility in the recent past. However, expected operationalisation of its Moitra coking coal block by FY2020 and the upcoming auction of its iron ore mines in Karnataka are likely to improve the company s raw material security position in the medium term. Large capex to be incurred over the next three years - Apart from the announcement of a capex programme of Rs. 26,815-crore last year, the company announced an additional capex Rs. 17,561-crore in the current fiscal, which after deducting the capex incurred in FY2018 of Rs. 4,689-crore, keeps the capex commitments large, at about Rs. 39,687- crore over the period FY The ongoing capex is to be funded by a debt of about Rs. 23,400-crore and the balance by way of internal accruals. While the project gearing of about 1.4 time for this capex remains similar to the existing gearing levels, the sizeable nature of the capex would exert pressure on the free cash flows of the company and would keep the overall debt levels elevated. Aggressive inorganic growth appetite In the current fiscal, the company acquired steel assets in the USA and in Italy and became the successful resolution applicant for the acquisition of Monnet Ispat & Energy Ltd as a consortium partner with AION Investments. Although the capital cost per tonne for these acquisitions remains moderate in absolute terms, the company remains exposed to business integration and off-take risks, especially in the overseas markets. While JSW has also evinced interest in acquiring additional stressed steel assets under the IBC framework, ICRA derives comfort from the company's strategy of partnering with reputed private equity funds for acquisition of such assets, which would keep its debt requirements for funding such inorganic growth options at low levels. Exposure to forex risks Given JSW s dependence on imports for coking coal and its large forex debt (39% of total standalone debt as on March 31, 2018), the company remains exposed to forex risks, which are largely mitigated by way of its hedging policy fully covering its revenue account and next one year s debt service obligations, and inherent linkage of steel realisations with foreign exchange rates. Weak, although improving, financial profile of US-based plate and pipe mill Improved demand from the oil and gas industries in the US led to better capacity utilisation of JSW s plate and pipe mill operations, which improved to 26% and 9% respectively in FY2018 from 18% and 7% in FY2017. However, the utilisation levels continue to remain low in absolute terms and exert pressure on JSW s consolidated business return indicators. Also, JSW s iron ore mine at Chile remained under care and maintenance due to non-remunerative iron ore prices internationally. Analytical approach: For arriving at the ratings, ICRA has taken a consolidated view of JSW Steel and its subsidiaries and has also applied its rating methodologies as indicated below. 4

5 Links to applicable criteria Rating Methodology for entities in the Ferrous Metals Industry Corporate Credit Rating Methodology About the company JSW Steel Ltd. (JSW Steel), a part of the O.P. Jindal Group, manufactures iron and steel products. The company s products include hot-rolled steel strips, sheets/plates, mild steel (MS) cold-rolled coils/sheets, MS galvanised plain/corrugated/colour-coated coils/sheet, steel billet, bars and rods. As on date, the company s plants in Karnataka, Tamil Nadu and Maharashtra have a combined installed capacity of 18.0 million tonne per annum (mtpa) in India. JSW Coated Products Ltd., a 100% subsidiary of JSW Steel, has manufacturing facilities at Vasind and Tarapur (near Mumbai) and Kalmeshwar (near Nagpur) in Maharashtra for value-added steel products. The company also has a plate-and-pipemill business in the US, iron ore mines in Chile and coal mines in the US and Mozambique, which operate through its international subsidiaries. Recently, the company acquired steel assets in the US and Italy with installed capacities of 1.5 mtpa (with potential to expand upto 3 mtpa) and 1.32 mtpa respectively and also emerged as a successful resolution applicant for the acquisition of Monnet Ispat and Energy Limited as a consortium partner with AION Investments under the IBC framework. In FY2018, the company on a consolidated basis reported a net profit of Rs. 6,072-crore on an operating income of Rs. 70,225-crore, as compared to a net profit of Rs. 3,454-crore on an operating income of Rs. 55,604-crore in the previous year. Key financial indicators (Consolidated) FY2017 FY2018 Operating Income 55,604 70,225 PAT 3,454 6,072 OPBDIT/OI (%) 21.9% 21.1% RoCE (%) 15.0% 17.8% Total Debt/TNW (times) Total Debt/OPBDIT (times) Interest coverage (times) Status of non-cooperation with previous CRA: Not applicable Any other information: None 5

6 Rating history for last three years: Chronology of Rating History for the Current Rating (FY2019) Past 3 Years Amount Amount Date & Rating Date & Rating in FY2018 Date & Rating in FY2017 Date & Rating in FY2016 Instrument Type Rated Outstanding* August 2018 July 2017 October 2016 February Term Loans/ Long Term 24,759 20,476 [ICRA]AA Standby Letter (Stable) (Stable) (Negative) (Negative) of Credit 2 Proposed Term Long Term 5,000 - [ICRA]AA - - Loan (Stable) (Stable) 3 Fund-based Short Term 1, [ICRA]A1+ [ICRA]A1+ [ICRA]A1+ [ICRA]A1+ Limits 4 Fundbased/Non-fund Long 5, ,476 [ICRA]AA Term/Short (Stable)/ (Stable)/ (Negative)/ (Negative)/ Based Term [ICRA]A1+ [ICRA]A1+ [ICRA]A1+ [ICRA]A1+ 5 Non-fund Based Short Term 19,600 10,850 [ICRA]A1+ [ICRA]A1+ [ICRA]A1+ [ICRA]A1+ 6 Non-convertible Debentures (NCD) Long Term 3,704 3,704 [ICRA]AA (Stable) 7 Proposed NCDs Long Term 2,000 - [ICRA]AA (Stable) (Stable) (Stable) (Negative) (Negative) (Negative) 8 Commercial Paper (CP) Short Term 5,000 1,250 [ICRA]A1+ [ICRA]A1+ [ICRA]A1+ [ICRA]A1+ *As on March 31, 2018 Complexity level of the rated instrument: ICRA has classified various instruments based on their complexity as "Simple", "Complex" and "Highly Complex". The classification of instruments according to their complexity levels is available on the website - 6

7 Annexure-1: Instrument Details ISIN No Instrument Name Date of Issuance / Sanction Coupon Rate Maturity Date Amount Rated Current Rating and Outlook NA Cash Credit NA NA NA 1, [ICRA]A1+ NA Non-fund Based NA NA - 19, [ICRA]A1+ (LC/BG) NA Fund-based/Nonfund Based limits NA NA - 5,844.4 [ICRA]AA(Stable)/ [ICRA]A1+ NA Term Loans Varying from NA Varying from 24, [ICRA]AA(Stable) FY2010 to FY2019 FY2019 to FY2027 NA Proposed Term NA NA NA 5, [ICRA]AA(Stable) loans INE019A07241 NCD 1 NA 10.34% 18-Jan , [ICRA]AA(Stable) INE019A07357 NCD 2 NA 10.6% 19-Aug [ICRA]AA(Stable) INE019A07167 INE019A07183 NCD 3 NA 10.6% first tranche maturity date 02-Jul [ICRA]AA(Stable) [ICRA]AA(Stable) Second tranche 02-Feb-2020 INE019A07258 NCD 4 NA 10.02% first tranche maturity date 20-May , [ICRA]AA(Stable) [ICRA]AA(Stable) INE019A07266 Second tranche 19-Jul-2023 INE019A07324 NCD 5 NA 10.4% 19-Aug [ICRA]AA(Stable) INE019A07340 NCD 6 NA 10.5% 19-Aug [ICRA]AA(Stable) INE019A07399 NCD 7 NA 9.665% 23-Dec [ICRA]AA(Stable) INE019A07407 NCD 8 NA 9.72% 23-Dec [ICRA]AA(Stable) NA Proposed NCD NA NA NA 2, [ICRA]AA(Stable) NA Commercial Paper NA NA days 5, [ICRA]A1+ Source: JSW Steel Limited 7

8 ANALYST CONTACTS Jayanta Roy Priyesh Ruparelia Relationship Contact L Shivakumar shivakumar@icraindia.com MEDIA AND PUBLIC RELATIONS CONTACT Ms. Naznin Prodhani Tel: communications@icraindia.com Helpline for business queries: (open Monday to Friday, from 9:30 am to 6 pm) info@icraindia.com About ICRA Limited: ICRA Limited was set up in 1991 by leading financial/investment institutions, commercial banks and financial services companies as an independent and professional investment Information and Credit Rating Agency. Today, ICRA and its subsidiaries together form the ICRA Group of Companies (Group ICRA). ICRA is a Public Limited Company, with its shares listed on the Bombay Stock Exchange and the National Stock Exchange. The international Credit Rating Agency Moody s Investors Service is ICRA s largest shareholder. For more information, visit 8

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