JSW Steel’s US subsidiary continues to struggle and its outlook doesn’t seem too bright in the medium term. When asked about the US operations recently, Sajjan Jindal, vice-chairman and managing director, JSW Steel, said, “You have touched a paining nerve. The US operation continues to struggle and is currently working at a capacity utilisation of 20-25%.” He said the subsidiary has stopped losing money at least. However, the steelmaker doesn’t see it making any money going forward. Jindal said, “In the coming year, we won’t lose any money but may not make money there either.”
JSW Steel has a gross debt of Rs 16,500 crore largely due to its expansion going on in India and the US subsidiary, which it bought in 2007 for $940 million from a group company Jindal Saw. These mills have 1.2 million tonne plate and 0.5 million tonne of pipe-making capacity in a year.
The steelmaker’s consolidated net long-term debt gearing was at 1.60 for the second quarter as against 1.67 for the first quarter ended June 30.
Due to this higher debt and the global crisis, the steelmaker and some of its subsidiaries, including the US one, were unable to service their debt as agreed upon in the loan agreements.
JSW Steel had earlier said, “The deviations in adherence to covenants in loan agreements also resulted in non compliance in terms of the Trust Deed executed in connection with the issue of $325 million foreign currency convertible bonds in June 2007.”
It is learnt that the steelmaker has approached its lenders to obtain waivers of past defaults with respect to the above said credit facilities.
JSW Steel had said it was also looking for relaxations of relevant covenants from its lenders. However, all the lenders haven’t relaxed these covenants till now and the company is in talks with them for respite. It had said, “We have obtained necessary waivers and/or amendments from some lenders and believes it is on track to receive the approvals from the remaining relevant lenders in due course.”
The steelmaker is walking a cautious line as has kept the trustees for the FCCBs informed about the company’s dwindling financial health.
Going forward, the steel prices are not expected to rise considerably making it difficult for the steelmaker to meet its repayment obligations.
“With Chinese exports still rising, this reduces chances of a price recovery, which may bring the steel cycle to a premature end and also pressure raw material contracts for FY11,” Neelkanth Mishra, Anubhav Aggarwal and Riya Bhattacharya of Credit Suisse wrote in a recent report.
The analysts, in another report on November 30, downgraded JSW Steel to underperform. They said the JSW’s US operations are expected to be an Ebitda (operating profit) negative by $34 million (FY10), down 15%.
The report expects that the US subsidiary will post an Ebitda of just $1 million for financial year 2011.
Sumeet Singhania of Antique Stock Broking in a July report said, “We expect the US plate and pipe facility to continue operating at low capacity utilisation due to the demand slump in the US oil and gas sector. We estimate a loss at net income level of $40 million for FY10 on account of high depreciation and interest costs.”
Comments