Steel Authority of India Ltd. Rating Affirmed At BBB; Outlook Negative

Singapore : Standard & Poor’s Ratings Services said today that it had affirmed its ‘BBB-‘ long-term corporate credit rating on Steel Authority of India Ltd. (SAIL). The outlook is negative.

“We affirmed the ratings on SAIL because we expect the company’s financial strength to improve to levels commensurate with the rating by the end of the fiscal year ending March 31, 2015,” said Standard & Poor’s credit analyst Wee Khim Loy.

We have also revised our assessment of the likelihood of extraordinary government support to SAIL to “moderately high” from “moderate,” as our criteria define the terms.

We believe SAIL’s ‘bbb-‘ stand-alone credit profile faces downward pressure because of ongoing project delays, which has deferred EBITDA generation. SAIL’s materially weak financial performance in fiscal 2013 will make it difficult for the company to improve its financial strength to a range commensurate with the rating in the next 12 months. This is despite our expectation of higher EBITDA per ton of about US$95 per ton in fiscal 2014, compared with US$75 a ton in fiscal 2013. EBITDA per ton was more than US$100 a ton in earlier years.

In our view, SAIL’s operating conditions in India remain soft, with slower GDP growth and a stagnating investment cycle. We also expect the company to continue with its planned capital expenditure, which will add to its debt over the next 12-18 months. We estimate SAIL’s ratio of adjusted debt to EBITDA to be about 4.0x for fiscal 2014, compared with our downgrade trigger of 3.5x on a sustainable basis. We adjust SAIL’s debt by deducting surplus cash more than Indian rupee (INR) 45 billion.

We expect SAIL to bring some of its new capacity to production over the next two to three quarters. The benefits will start to accrue in the form of incremental production and cash flow generation from fiscal 2015. We believe the company’s planned capital expenditure will generate negative free operating cash flow over the next 24 months. A part of the capital expenditure is targeted at plant modernization. We therefore expect SAIL’s profitability to improve.

According to our criteria for government-related entities, the “moderately high” likelihood of extraordinary government reflects SAIL’s “limited importance” to, and “very strong link” with, the Indian government.

“The negative outlook reflects downside risk to SAIL’s operating and financial performance over the next 12-24 months because of a further delay in the company’s commissioning of expansion projects, and its inability to significantly improve profitability,” said Ms. Loy. “The outlook also reflects the negative outlook on the issuer credit rating on India.”

We could lower the rating on SAIL if the company’s stand-alone credit profile continues to deteriorate, such that the ratio of adjusted debt to EBITDA is likely to be more than 3.5x in fiscal 2015 and thereafter. This could happen if capacity addition is delayed further or EBITDA is less than US$90 per ton on a sustained basis. We could also downgrade SAIL if we lower the issuer credit rating on India (unsolicited rating BBB-/Negative/A-3).

We could revise the outlook to stable if: (1) we revise the rating outlook on India to stable; and (2) SAIL’s cash flow protection measures improve after the completion of some of its large expansion projects, such that we expect its adjusted debt-to-EBITDA ratio to be about 3.0x on a sustained basis.