Rationale

The rating upgrade factors in the significant reduction in Jindal Steel and Power Limited's (JSPL or the company) debt levels, facilitating a material improvement in its credit metrics. ICRA estimates the company's consolidated Net Debt/ OPBDITA at ~0.5x at the end of FY2022, compared to 1.54x in March 2021 and 0.7x in September 2021. Deleveraging of the company's balance sheet has been supported by its sustained robust operating performance in FY2021 and current fiscal so far amid the strong steel upcycle, facilitating healthy free cash flow generation. In addition to expectations of continued robust profits, ICRA expects JPL's divestment to conclude in the near term, which will also result in a cash inflow and support deleveraging. Further while upgrading the rating, ICRA has taken note of JSPL's improving raw material security, with a major coking coal mine in Australia commencing operations in November 2021 and vesting of an iron ore mine with material reserves in India (Kasia mines), reducing the price and supply risks for the company's key raw materials. The company is undertaking capacity expansion in Angul (Odisha) under a wholly-owned subsidiary, Jindal Steel Odisha Limited (JSOL), at an estimated outlay of Rs. 22,468 crore (gross of input tax credit), proposed to be funded in a debt-to-equity ratio of 70:30. While the capex exposes the company to associated project risks, ICRA draws comfort from the company's established track record of successful commissioning of greenfield/brownfield capacities and running its plants at healthy capacity utilisation. In addition, the company's stated intent to maintain consolidated Net Debt/ OPBDITA at 1.5x or less and a minimum liquidity cushion of Rs. 1,500-2,000 crore, including unutilised fund-based limits at all times, provides comfort on its liquidity profile and financial policy, given the cyclical nature of the sector. The ratings continue to draw strength from JSPL's established position as one of the leading steel producers in India with a sizeable presence in pelletisation, mining and captive power generation. Its operational profile is characterised by its largescale and cost competitive operations, healthy track record in steel and power sectors, favourably located plants in proximity to various coal and iron ore mines, as well as a diversified and value-added product portfolio. The ratings, however, continue to be constrained by the inherent vulnerability of the steel business to volatility in metal prices as well as the price and supply risks associated with coal and iron ore procurement, as the captive mines provide part coverage for requirements. The Stable outlook on JSPL's long-term rating reflects ICRA's expectation of continued healthy operating performance over the near to medium term, leading to strong profits and cash accruals. While ICRA expects the profitability levels to moderate, with normalisation of steel prices, the significant deleveraging is expected to help the company maintain a healthy financial profile and provide improved cushion to withstand cyclical downturns, despite the planned debt-funded capex programme.