Bhushan Steel, Essar Steel low-hanging fruit for buyers

Ready-made capacity at a significantly low price point is what the National Company Law Tribunal (NCLT)-listed Bhushan Steel and Essar Steel will instantly deliver to a new buyer. Where lenders have lost faith in the promoters of the two debt-laden entities, lucrative opportunities await domestic as well as overseas steel players wanting to expand in the alloy sector, said analysts tracking the two companies.

Essar Steel and Bhushan Steel are in the high-margin flat products business. Since there is demand for flats in the domestic as well as export market, brokerages are of the view that the sales volumes of the two companies will remain strong through the year, including the usual lean season between July and September. Steel long products, on the other hand, which are a relatively low-margin business, draw demand only from the domestic market. 

In June, the RBI directed lenders to refer around 12 companies to the NCLT under the Insolvency and Bankruptcy Code (IBC) following several failed attempts at loan recovery. The Ruias-owned Essar Steel and the Brij Bhushan Singhal-founded Bhushan Steel featured in this list along with others.

Delhi-based Bhushan Steel, the third largest secondary producer in the country, has a capacity of 5.6 million tonnes located in iron ore-rich Odisha, while Essar Steel has 10 million tonnes of installed capacity in Gujarat.

“Both the firms, in terms of their backward integration and also market share, are well positioned in the India market. But with balance sheets remaining heavy, there exists ample bargaining power with the buyer and the asset price can be brought down to even half (compared to a capex greenfield project),” an analyst said on condition of anonymity. 

According to Abhisar Jain, senior analyst with Centrum Brokerage, the new owners would be attracted to these assets. "A decent discount to capex greenfield capacity is likely, but what that discount would be is very case-specific,” he said.

As on March 31, 2017, the debt-equity ratio of Bhushan Steel stood at 153.47, while that of Essar Steel was 32.60. In terms of market share, Essar Steel has a strong presence in the western and northern parts, while Bhushan Steel has a market for its products in the central and eastern parts of India.

The domestic steel industry has been receiving strong support from the Ministry of Steel in the last couple of years in resolving industry issues such as curbing cheap imports into the country or providing preference to domestic players in new projects. Due to this, brokerages are of the view that a new buyer has a decent long-term business opportunity though these assets are NCLT-listed.

Through the National Steel Policy 2017, India is aiming to produce 300 million tonnes of steel by 2030. Given the thrust on increasing domestic steel production and estimates of a rise in demand, the two NCLT-listed firms are attractive purchases at this juncture where setting up of greenfield capacities could mean unending approvals. 

“Between the two, the Bhushan Steel asset is more hassle-free as Essar Steel's 6.8 million tonne gas-based sponge iron ore plant at Hazira could be a sticking point for a buyer unaware of how to tackle supply,” said a Mumbai-based analyst on condition of anonymity. Natural gas supply has been an issue with the Essar plant in the past.

In terms of backward integration and logistical cost, Bhushan Steel and Essar Steel have appropriately positioned themselves in the market. 

Odisha's iron ore, compared to that in Karnataka, is cheaper and hence works as a lower input cost for Bhushan Steel relative to its rivals like the Sajjan Jindal-led JSW Steel. Essar Steel, too, has its logistical advantages in an iron ore slurry pipeline on the east coast. Moreover, the company has also set up a 30 million tonne, all-weather, deep draft dry bulk port at Hazira in Gujarat. Located on the western coast of India, the port is used for import of iron ore, pellets, limestone and other dry bulk cargo, and export of finished steel, which helps Essar keep its transportation cost under control.  

Despite their debt levels, analysts said both Bhushan Steel and Essar Steel could be good purchases for companies with lighter balance sheets and strong fund-raising capacity seeking a deeper presence in the growing steel market of the country.