Jindal Steel and Power Ltd’s (JSPL’s) equity investors appear unperturbed by the company’s debt getting a default rating, if the share price is a reliable indicator. Then again, its share is down by 65% from a year ago, so maybe the default rating is not news to them.
Crisil Ltd has rated JSPL’s debt, all of Rs.32,638 crore, as default, citing delayed payment of interest on term loans due to weakened liquidity. Falling steel price realizations are affecting margins and this tough period is coinciding with obligations to repay debt. Delays in the company’s plans to raise funds by selling assets, transferring certain assets to joint ventures and refinancing debt have not moved ahead.
If JSPL’s steel business is under pressure, then its power business too is suffering from “demand and price volatility in the merchant market and lack of raw material integration”, says the Crisil note. In addition to the debt downgrade, a 9 March Economic Times report indicated that lenders of foreign debt worth $500 million (around Rs.3,375 crore) may recall their loans.
The problem is indeed a difficult one but it isn’t new. All the negative news in this week prompted JSPL to issue a note which mostly reiterates what everyone knows but for a few points. The rating is based on technical grounds, it said, and added that the company had met its obligations till November-December. JSPL said it is confident that once its efforts to restructure debt are complete, it will not be in default. However, what is not stated is when this exercise will be completed—the quarter has barely 20 days to end.
JSPL also said that additional steel and power capacity that have been commissioned are stabilizing. Higher output, improving demand and realizations should lead to better cash flows in FY17 than seen in the past four quarters. In the December quarter, its Ebitda (earnings before interest, taxes, depreciation and amortization) was Rs.550 crore, while its interest cost was Rs.806 crore.
Given time, it is reasonable to expect JSPL’s business position to improve. The government is keen to ensure that both the power and steel sectors do better and, in turn, ensure that the banking sector’s assets don’t turn bad. Those measures are working and steel prices have begun to move up. Will this continue even as an increase in domestic steel capacity leads to more supply? A recent report by Morgan Stanley Research states that the worst is over for steel, as China is moving to curb its excess capacity. Even in power, the situation is beginning to look better.
The real issues are how much time lenders are willing to give JSPL to get back on track, how long the company will take to work out a comprehensive debt restructuring programme, and how much time it will take for the firm to fulfil its plan to sell stakes in some of its operations. Buyers know its desperate situation and may drive a much tougher bargain than in normal times.
A default rating does raise the fear, however remote the possibility, of all these measures not working out, and lenders moving in to take control. JSPL’s statement indicates confidence that it will recover in FY17. For the moment, equity investors are giving it the benefit of doubt.
The writer does not own shares in the above-mentioned companies.