Press Release JSW Projects Limited - careratings.com

1 1 CARE Ratings Limited Press Release JSW Projects Limited March 14, 2018 Ratings Facilities Amount (Rs. crore) Rating1 Rating Action Long term Bank Facilities (reduced from ) CARE A+ (Single A Plus; Stable) Reaffirmed and removed from credit watch Short term bank facilities CARE A1+ (A One Plus) Total (Rs. One thousand three hundred sixty-seven crore and forty lakhs only) Details of instruments/facilities in Annexure-1 The ratings assigned to the bank facilities of JSW Projects Limited (JPL) were placed on credit watch with developing implications in view of the impending possible impact of approval of scheme of amalgamation of Pratirup Advisory Services Limited (PASPL; ultimate holding company of JPL) and Unity Advisory Services Private Limited (UASPL; holding company of JPL) with JPL by the Hon ble National Company Law Tribunal (NCLT).

2 The credit watch has been removed as the amalgamation process has been completed. The reaffirmation of the ratings assigned to the bank facilities of JSW Projects Limited (JPL) takes into account the stable operational and improved financial performance during FY17 and 9 MFY18 as well as liquidity profile marked by low utilization of the bank limits. Furthermore, the ratings continue to factor in the strong promoters, JSW group, with a substantial presence in the Indian steel industry and experienced management, integration and alignment of JPL s facilities with the steelmaking operations of JSW Steel Ltd (JSWSL) and the healthy profitability margins due to the job-work nature of the operations ensuring adequate cash flow for debt servicing.

3 The ratings are, however, constrained by high overall gearing, lower than expected capacity utilization of the Direct Reduced Iron (DRI) plant owing to technical issues during FY17, exposure to foreign exchange fluctuation and cyclical nature of the steel industry. JPL s ability to achieve the envisaged revenue and profit following optimum utilization of the DRI facility and improve its capital structure are the key rating sensitivities. Detailed description of the key rating drivers Key Rating Strengths Significant presence of JSW group in the Indian steel and related industry: JPL is part of the JSW group promoted by Mr.

4 Sajjan Jindal. The JSW group has significant presence in diversified business segments like steel, energy, minerals and mining, infrastructure & logistics, cement, port and information technology. JSWSL, with its steelmaking capacity of 18 mtpa, is one of the largest steel producers in India. JPL draws significant support from the promoters experience and resourcefulness. Experienced management: JSW group is one of the fastest growing business groups in India. Over the past years, JSWSL and various group companies have ramped up their capacities in a timely and cost-effective manner. By virtue of being a part of the group, JPL draws strength from the JSW group s well-established track record in brownfield project execution and cost management expertise.

5 1 Complete definitions of the ratings assigned are available at and in other CARE publications. 2 CARE Ratings Limited Press Release Integration with JSWSL s business: JPL s facilities are a part of integrated steelmaking capacity of 10 mtpa at JSWSL s Vijayanagar works (Karnataka). COREX-based DRI produced by JPL is utilised as feed for JSWSL s Steel Melting Shop (SMS-3), having a capacity of mtpa. The DRI plant is principal to JSWSL s SMS-3 as there is scarce availability of gas-based DRI in the domestic market and also, the gas-based DRI acts as a substitution for imported steel scrap.

6 The dry quenched coke produced by JPL has replaced wet quenched coke previously used in JSWSL s blast furnace. In addition, JPL s CPP(Captive Power Plant) uses the heat produced during coke quenching process, which further enhances viability of CDQ plants. Thus, the DRI and dry quenched coke produced by JPL ensure continuous supply of high quality key inputs for JSWSL s steelmaking process, thereby optimizing the cost of operation. Healthy profitability due to job-work nature of operations: JPL has entered into job work agreements for both CDQ and DRI operations with JSWSL. The company receives fixed conversion charges of Rs.

7 225 per tonne for conversion of each tonne of hot coke and Rs. 7500 per tonne for each tonne of DRI delivered. Service nature of operations of CDQ and DRI plants (wherein JPL is not required to carry inventory) as well as proximity to JSWSL s plant and some of the operation costs being shared with JSWSL lead to healthy PBILDT margins of JPL ensuring sufficient cash flow for meeting its debt servicing obligations. Stable operational and improved financial performance in FY17: CDQ plants were operating at optimal level with capacity utilization of 93% during FY17, while DRI plant had been operating at 66% capacity utilization.

8 During FY16, the company also started the coal based DRI unit of MTPA which was acquired on a slum sale basis in FY14. The operations had been stabilized in FY17 and the plant has been operating at an optimal utilization of 83%.The total operating income and the profitability margins of JPL improved in FY17 due to increased production from CDQ and DRI plants as well as lower interest costs during the year. The company has adequate liquidity marked by low utilisation of the bank limits. Going forward, the ability of the company to improve the capacity utilization of the DRI plant will be crucial to further improve its overall performance.

9 Key Rating Weaknesses High overall gearing: The capital structure of the company deteriorated as on March 31, 2017 (post amalgamation) owing to transfer of debt of Rs. 850 crore led by amalgamation of the holding company. This debt comprises of zero coupon bonds pledged by the shares of JSW Steel Limited and JSW Energy Limited and would be refinanced at the time of redemption. Also, most of the bank term loan of JPL would be repaid by then. Exposure to foreign exchange fluctuation: JPL had availed External Commercial Borrowing (ECB) facilities, which were utilized for purchase of equipment from overseas vendors.

10 With all its production earmarked for sales to JSWSL in INR currency, JPL is exposed to foreign exchange fluctuation risk for its foreign currency outflows. However, the company uses foreign currency forward contracts to hedge its risks associated with foreign exchange fluctuations. Cyclical nature of the steel industry: Prospects of steel industry are strongly co-related to economic cycles. Demand for steel is sensitive to trends of particular industries, viz. automotive, construction, infrastructure and consumer durables, which are the key consumers of steel products. These key user industries in turn depend on various macroeconomic factors and when downturns occur in these economies or sectors, steel industry may witness decline in demand.