But curtains came down on the good phase when the Supreme Court cancelled coal block allocations last year. A few days ago, another blow was dealt when lenders decided "in principle" to approve a strategic debt restructuring that could see banks taking over management control. On July 27, Electrosteel Steels sent a notice to the stock exchanges to this effect.
Details of the restructuring are awaited but the company said that in the interim, bankers/company would continue to explore the proposals of investment. Electrosteel Steels had informed the stock exchange sometime back that it had received term sheets for investment from the Tata group and a financial investor based in Singapore. Even as such options are being weighed, 50 per cent of the net worth of the company has been eroded at the end of March 31, 2015, necessitating its referral to the Board for Industrial and Financial Reconstruction.
In 2013, a consortium of 27 banks and financial institutions had supported Electrosteel Steels' proposal to restructure debt of around Rs 6,175 crore after it became difficult for the company to service it. But how did it come to such a pass? Electrosteel did not comment for this report, but it's a combination of factors that went against the project.
Electrosteel Steels was promoted by Electrosteel Castings to set up a 2.51 million tonne integrated steel and ductile iron pipes project in Jharkhand. The total cost of the project was Rs 11,000 crore. When many steel projects were suffering from want of raw material, Electrosteel Castings had already secured it.
An arrangement between Electrosteel Steels and Electrosteel Castings was worked out. The former was to source iron ore and coking coal from the latter for a period of 20 years. Electrosteel Castings would meet the demand for coking coal from its own mine at Parbatpur (about 30 per cent) and the balance from other sources. The Parbatpur mine had reserves of 231 million tonnes. Eletrosteel Castings also had an iron ore mine and a non-coking coal mine in Jharkhand.
The stumbling blocks
The implementation got delayed. First, the Chinese-made project, meant to be a case study for the industry, went wrong. "Electrosteel Steels' project was planned on import of the entire project from China, with the complete design and engineering by Chinese consulting and constructing firms. The construction contracts were given to two Chinese companies and construction management and training contract was also given to a Chinese firm. It was essential and critical to co-ordinate between design, supply and construction team," the company had told Business Standard earlier.
But the Chinese took about two months to mobilise skeleton teams to the site. Once construction picked up speed and sufficient people were at the site, a new issue cropped up as the government cancelled the visas. "Almost all the Chinese personnel had to leave India, leading to an almost force majeure situation," the company had said.
Then, funds from the banks got delayed by more than 15 months which resulted in further increase in interest and overheads.
"The steel project was conceived when the steel industry was doing well, 6-8 years back. It was a natural extension of the ductile iron facility which was profitable - and still is. When the steel market tanked (midway through the steel project), the situation changed dramatically," J J Irani, who is on the board of Electrosteel Castings, explains. "One needs very deep pockets to survive, as other steelmakers have also found out. Bank finances were delayed and costs shot up. Another body blow was loss of captive coal supplies as a consequence of the coal scam."
Still, there was hope. According to the company's calculations in 2013, 100 per cent capacity utilisation would have translated into cash generation of around Rs 2,000 crore per annum which would have been sufficient to service the debt. But those calculations went awry when steel prices went down further. The prices of products made by Electrosteel Steel have softened 10-20 per cent in the last one year.
As it bought raw material from the market at higher prices, it became an impossible situation to tide over for Electrotseel Steels.
These are trying times for the steel industry and Electrosteel Steel is not alone - bigger players like Bhushan Steel too landed in a similar situation last year as the steel market suffered.
In 2010, even when Electrosteel Castings was no longer a monopoly and competition was eating into its market, it had 60 per cent market share. Though it reported a significant loss of Rs 116 crore on revenues of Rs 2,401 crore at the end of March 2015, competitors believe that it would turn around once infrastructure projects take off because that's the business Kejriwals know. As Irani puts it, with the "advantage of hindsight, ductile iron is a much better industry to be in."