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Fitch Rat­ings has down­graded JSW Steel rat­ing with the neg­a­tive out­look on con­cerns over pro­longed weak in­ter­na­tional steel prices and high lever­age. The agency also down­graded the com­pany's se­nior un­se­cured rat­ing and the rat­ing on its $500 mil­lion 4.75 per cent se­nior un­se­cured notes due 2019 to 'BB' from 'BB+'.

The down­grade re­flects the de­cline in prof­itabil­ity and rise in lever­age dur­ing a pro­longed pe­riod of weak in­ter­na­tional steel prices, cou­pled with debt-funded in­vest­ment in ca­pac­ity ex­pan­sion, it said.

Fitch ex­pects the av­er­age sell­ing price of steel sold by the com­pany to in­crease from this fi­nan­cial year with new ca­pac­ity ad­di­tion go­ing on stream and govern­ment mea­sures to sup­port do­mes­tic price.

How­ever, it said there are still risks to sell­ing prices if the Govern­ment de­cides to lift the reg­u­la­tory pro­tec­tion, and if the com­pany em­barks on an­other phase of debt-funded ex­pan­sion.

JSW Steel's con­sol­i­dated Ebitda per unit de­clined to about Rs. 4,800 a tonne from Rs. 7,800 a tonne in FY-15. The av­er­age sell­ing price of the com­pany has fallen by Rs. 8,500 a tonne. The global steel in­dus­try is suf­fer­ing from weak de­mand and over­ca­pac­ity, and global ca­pac­ity util­i­sa­tion is at a level last seen dur­ing the 2008-2009 global fi­nan­cial cri­sis, it said.

In In­dia, steel de­mand growth was tepid at 4.7 per cent in the first nine months of this fis­cal.

The 29 per cent in­crease in im­ports led to govern­ment fix­ing min­i­mum im­port price be­tween $341 and $752 a tonne on 173 steel prod­ucts, be­sides ex­tend­ing safe­guard duty till March 2018.

Though steel prices have risen by Rs. 4,000 a tonne since Jan­uary, it is still lower by about 20 per cent com­pared to the av­er­age sell­ing price in FY-15.

Fitch's fore­cast as­sumes that fur­ther price hikes will be con­strained in the near term, given the in­tense com­pe­ti­tion among do­mes­tic pro­duc­ers to sup­port util­i­sa­tion rates.

How­ever, JSW Steel’s abil­ity to de-lever­age its bal­ance sheet would de­rail, if the govern­ment re­moves the pro­tec­tion ahead of any sig­nif­i­cant im­prove­ment in the global steel prices.

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