OREANDA-NEWS. Fitch Ratings has revised the Outlook on Steel Authority of India Limited's (SAIL) Long-Term Foreign-Currency Issuer Default Rating (IDR) to Negative from Stable. The IDR is affirmed at 'BBB-'.

The Outlook revision reflects SAIL's higher leverage and subdued operating performance following weak economic growth in India. Delays in execution of debt-funded expansion and modernisation programme, low profitability and muted demand have led to deterioration in the company's credit profile.

Fitch expects SAIL's performance to improve significantly over the next two years, supported by rising volumes and improving in cost efficiencies following the completion of the expansion and modernisation programme. Although Fitch believes a reduction in leverage could be possible from 2016, SAIL's failure to restore its leverage to below 3.5x over the medium term would pressure the ratings. Continued weak steel demand growth in India or high steel imports or a further softening in global steel prices could derail the company's efforts to deleverage.

KEY RATING DRIVERS
Capex Nearing Completion After Delays: SAIL's capex, which was originally slated for completion at the end of the financial year ended 31 March 2013 (FY13) or in early FY14, is nearing completion with SAIL commissioning a large part of its capex during FY15 (majority during 2HFY15). Consequently, Fitch expects major benefits from the capex totalling INR618.7bn for modernisation and expansion to start accruing from FY16. The agency expects the bigger volumes, better operational efficiencies and higher share of value-added products to support strong growth in SAIL's profitability and operational cash flows.

Financial Profile Weak, But to Improve: The company's net leverage increased to 5.5x during FY14 (FY13: 3.85x) while the EBITDA interest cover fell to 4.3x (FY13: 6.2x) due to muted steel demand that weakened profitability and rising net debt from its capex. The weak metrics likely continued into FY15, but Fitch expects SAIL's performance to improve over the next two years, which will support significant deleveraging. The agency expects SAIL's net leverage (net debt/operating EBITDA) to improve to below 3.5x by FY17.

Leadership Position: SAIL is the largest manufacturer of steel in India with crude steel production of 13.5 million tonnes (mt) in FY14. The company is in the process of expanding its capacity to 21.4mt by FY16. SAIL's leadership position is supported by its high level of vertical linkages - 100% in iron ore and two-thirds in power. However SAIL has limited coking coal linkages and imports more than 75% of its requirements.

Linkages with the State: SAIL's rating also benefits from a one-notch uplift for moderate linkages with the government of India, its parent, in line with Fitch's Parent and Subsidiary Rating Linkage methodology. The government owns about 75% of SAIL's equity and retains significant control of the company. Fitch expects SAIL to play a key role in government's plan to enhance India's steel capacity to 300mt by year 2025 from around 101 mt in FY14. As one of seven state-owned entities granted Maharatna status by the government, SAIL enjoys significant operational and financial autonomy.

KEY ASSUMPTIONS

Fitch's key assumptions within our rating case for the issuer include:
- SAIL's steel production volume increases by over 10% in FY16 and around 15% in FY17
- Improvement in profitability resulting in EBITDA/ton of over INR6,200 by FY17 (9MFY15: INR 4,296)
- Completion of SAIL's expansion and modernisation during FY16
- Continuing weak steel prices with the hot-rolled coil (HRC) benchmark price of around USD450 per tonne over the next two years and stable USD/ INR exchange rate of 62.

RATING SENSITIVITIES
Negative: Future developments that may, individually or collectively, lead to negative rating action include
- SAIL's failure to demonstrate that it is on track to deleverage to around 3.5x by FY17 on a sustained basis;
- Downgrade of the Indian sovereign's Long-Term Foreign-Currency IDR would lead to a corresponding action on SAIL's IDR.
- Any significant weakening of linkages with the government of India.

Positive: The rating Outlook could return to Stable if:
- SAIL's financial performance improves, resulting in net leverage falling below 3.5x on a sustained basis.