JSW Steel's Deleveraging and Positive Free Cash Flow Generation is at Risk: Report
While maintaining its negative outlook with 'BB' rating on JSW Steel Ltd, ratings agency Fitch says, the company's deleveraging and free cash flow generations is at risk due to weak conditions in steel sector.
 
In a report, Fitch Ratings says, "We see risks to JSW Steel’s ability to deleverage and generate positive free cash flow (FCF) from weak industry conditions, an increase in its planned capex, or inability to stabilise and improve performance at acquired assets. We estimate total gross debt and earnings before interest, taxes, depreciation, and amortization (EBITDA) leverage for JSW to remain above four times until FY2021 and FCF negative until FY2022, before improving."
 
 
According to the ratings agency, for JSW Steel's ratings, leverage in FY2022 and the FCF profile beyond FY2022 are important, but it will aim to assess the company’s financial trajectory, growth plans and sector fundamentals, and take appropriate rating action within the next 12 months depending on whether our forecasts indicate JSW Steel will be unable to perform better than the sensitivities, or vice versa. 
 
"Undertaking of further large capacity expansion projects, delays in ramp-up of utilisation rates at recent acquisitions, and steel demand growth in India of below 5% could indicate that the EBITDA, leverage and FCF profile will be weaker than our expectations," it added.
 
During the first nine months (9M) of FY2020, JSW Steel's EBITDA for standalone Indian operations, which contribute almost all of its consolidated earnings, were down by around 40%, mainly due to weaker margin. Fitch says, "We expect a wider margin and volumes to drive higher EBITDA in FY2021. Its 9MFY20 consolidated EBITDA was also hit by losses at overseas operations, but we expect performance to improve in FY2021."
 
JSW Steel is boosting steelmaking and downstream capacity in India, and had indicated capex of around Rs320 billion in FY2020 and FY2021. Fitch says, "Capex for FY2020 has been cut by Rs50 billion by deferring certain projects, but we expect (JSW Steel's) spending to pick up in FY2021. We also think the company’s capex could remain high over the next two to three years."
 
 
Last month, JSW Steel received regulatory clearance to acquire Bhushan Power and Steel Ltd (BPSL). However, the case is now pending with the Supreme Court, and details regarding the proposed transaction structure are awaited. The next hearing in the case is scheduled for 15 April 2020.
 
BPSL, which has steelmaking capacity of around 2.75mtpa in Odisha state in eastern India, has been under insolvency proceedings since 2017. JSW Steel emerged as the preferred bidder in 2019 after raising its earlier bid higher than rivals such as Tata Steel Ltd. News reports indicate JSW Steel’s bid values BPSL’s assets at around Rs195 billion, and JSW Steel has indicated that it will assume a minority stake in BPSL post-acquisition after finding a partner.
 
Fitch has assumed an outflow of Rs43 billion from JSW Steel for the purchase of a 49% stake in BSPL in FY2020. However, it says, this payout could be delayed to FY2021 in light of pending legal proceedings. 
 
"We intend to consolidate, fully or proportionally, BPSL's debt and EBITDA for calculating JSW Steel's leverage metrics, even in the absence of any corporate guarantee from JSW Steel, due to BPSL's high strategic importance for JSW Steel and joint-management control. We intend to fully consolidate BPSL's financials if JSW Steel is unable to find an unrelated-party partner," the ratings agency concluded.
 
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    India lockdown throws online delivery out of gear, millions cry
    In an unprecedented crisis despite Prime Minister Narendra Modi assuring the continuation of essential services like food and groceries, online marketplaces like Flipkart and Amazon along with delivery platforms like Bigbasket, Grofers and FreshToHomes hit a major blockade on Wednesday as local authorities shut warehouses and sent delivery boys back, even harassed them.
     
    Millions of people across cities were left helpless at homes as essential items like fruits and vegetables, dairy and milk, meat and fish etc did not reach their doors despite placing orders well in advance. Later, the orders went dry.
     
    While Grofers' warehouse in Faridabad was closed by the local law enforcement agencies, Bigbasket complained that the police stopped its delivery partners and "some of them were even beaten up by for no fault of theirs".
     
    "We are not operational due to restrictions imposed by local authorities on movement of goods in spite of clear guidelines provided by central authorities to enable essential services. We are working with the authorities to be back soon,' Bigbasket tweeted.
     
    In a statement to IANS, Bigbasket said that it will help to have better coordination between the Centre and state, and between the state and local police to "ensure that our delivery vans and bikes don't get stopped by the police. Bigbasket and bb daily are not taking new orders".
     
    Furious people stormed the social media platforms, writing their plight to NITI Aayog CEO Amitabh Kant on Twitter.
     
    "Sir, all e-commerce are down. Believe me I tried everything (Grofers, Bigbasket, Flipkart, Amazon, Big Bazaar), no delivery till 31st March or Server Down or No Service. Need to think how we can enable them through digital India," tweeted one user.
     
    Kant tweeted back to Bigbasket: "They should give me specifics - State & location. I will act on it by getting in touch with concerned authorities & sorting it out. Govt guidelines exempt them. We will ensure that citizens are not impacted".
     
    Kant also responded to Grofers: "Cold storages & Warehouses as well as delivery of all essentials goods including food, pharma thru E-Commerce are exempted under MHA order. I have spoken to CS & DGP, Haryana . They have taken immediate action to ensure that supply chains efficiently function for the citizens".
     
    The subscription-based hyperlocal delivery startup FreshToHome sent messages to its customers, saying that despite the government declaring food delivery as essential, "we are facing hardships in continuing our operations".
     
    "Please bear with us as we are working hard to unblock local authority hurdles," said the FreshToHome team.
     
    Reports later surfaced that the Department for Promotion of Industry and Internal Trade (DPIIT) has initiated talks with the state Chief Secretaries asking them not to restrict movement of people engaged in home delivery of essential items, mentioned in the list of exempted items circulated by the Home Ministry.
     
    Meanwhile, Flipkart said it has temporarily suspended its operations and services - including grocery items. The marketplace has decided to halt all orders from March 25 for all three supply chains -- groceries, non-large goods and large items.
     
    "Flipkart has temporarily suspended orders as we assess the possibilities of operating in the lockdown. We are prioritising the safety of our delivery executives and seeking the support of the local governments and police authorities to meet the needs of our customers as they stay home during this lockdown," Rajneesh Kumar, Chief Corporate Affairs Officer, Flipkart, said in a statement.
     
    E-commerce giant Amazon said the company has to "temporarily stop taking orders and disable shipments for lower-priority products.
     
    "For all pending customer orders on lower-priority products, we are reaching out to customers and giving them a choice to cancel their orders, and receive a refund for prepaid items," said the company.
     
    Witnessing a surge in demand, supermarket chain Biz Bazaar entered the fray, with launching doorstep delivery services in major cities like Delhi, Mumbai, Bengaluru and Gurugram.
     
    However, within no time, Big Bazaar was flooded with calls, forcing the company to issue a statement, saying that "In light of the recent announcement, we are receiving an unprecedented number of requests for doorstep delivery. There could be a delay due to the restrictions on movements".
     
    Already battling massive surge in demand, the online delivery platforms faced other issues too, including zero access to several high-rises across the country which have gone under complete lockdown with all entry and exit gates locked.
     
    Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.
     
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    Domestic Hotels Staring at Major Disruption due to COVID-19: Ind-Ra
    Increasing intensity of the COVID-19 in India could meaningfully impact the operating metrics of hotels across segments and regions. Since the sector depends completely on the mobility of people, the outbreak possesses a direct impact on the business performance of this sector, says India Ratings and Research (Ind-Ra).  
     
    In a report, the ratings agency says, “Occupancy rates across hotel categories are likely to fall to their lowest levels in the last decade, materially impacting earnings. The industry in general would face challenges in debt servicing, especially for companies in the ramp-up mode, where a large portion of capex is funded by debt.”
     
    “Furthermore, this comes at a time when hotels typically enjoy peak season occupancy due to vacations and weddings before the onset of monsoons; hence, any disruption in operations would substantially impact the full-year operating performance of hotel companies,” the ratings agency added. 
     
    Ind-Ra estimates the occupancy of mid-scale and two-star hotels to fall to 30%-40% and that of four-star hotels and above categories to 20%-25% for the next three months beginning March-2020.
     
    The ratings agency sees sharp deterioration in occupancy rates in domestic hotels. It believes that the occupancy rates would have a multidimensional hit. 
     
    It says, “All the major drivers of occupancy rates could be impacted severely, as the movement of people gets limited due the government restrictions and self-precautionary measures taken by them. Considering a look-back analysis during the global financial crisis, the average absolute occupancy rates fell by over 9%. The highest fall of 10.40% was witnessed in the occupancy rates of four-star and above category hotels, followed by three-star ones at 8.5%, because they are mostly occupied by business travellers. These hotel categories have been impacted the most since business travel has shrunk largely post the global financial crisis, If we consider the global financial crisis as a benchmark, the magnitude and the impact on the drivers of occupancy rate due to COVID-19 is much larger than that during the post crisis period.”
     
    In its base case, estimates, Ind-Ra modelled the potential impact of COVID-19 on occupancy rates till first quarter (1Q) of FY2021 for different hotel categories. It says, “We assume a higher impact at end-4QFY20 and a modest recovery in the latter half of 1QFY21. We believe the occupancy rates of four-star and above category hotels to be impacted more than that of with three-star and mid-scale ones. This is because the revival in foreign tourist arrival could be stretched and depends heavily on the elimination of COVID-19. If on the other hand the spread in India gets contained in the next couple of months, the movement of people could see some traction and hence we might see some recovery in the mid-scale or three-scale hotels. However, if the intensity gathers pace, then occupancy rates could be significantly lower.” 
     
    Furthermore, Ind-Ra says, many south-east nations such as Singapore, Indonesia Hong Kong, where the outbreak started in January 2020 have witnessed a sharp decline in the occupancy rates. In some of these countries, occupancy rates fell to the levels lower than that was recorded during the SARS outbreak in 2003. The occupancy rate during the SARS crisis in China fell to sub 20% from around 70% within a three-month period. A similar situation in India cannot be ruled out, should the outbreak continue and containment remain limited.
     
    According to Ind-Ra, in the current scenario where travel restrictions are imposed and people voluntarily curb non-essential movement, there would not be any material change in the average room rate levels, as occupancy would be generated on essential need basis. Assuming the average room rate levels remains constant, the revenue per available room would deteriorate to the extent of change in occupancy levels, it added.
     
    “Considering Ind-Ra’s base case scenario over the next month, hotels under the four-star or above categories could witness around 65%-70% fall in the revenue per available room whereas the ratio for those under mid-scale and two-star categories could deteriorate between 50%-60%. Subsequent deterioration in credit metrics is likely,” the ratings agency concluded.
     
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