Failure to spot opportunities ahead of the curve proved costly for the ailing Ispat Industries
The younger siblings of steel tycoon Lakshmi Mittal — Pramod and Vinod — had a vision: To make Ispat Industries an organisation that continuously achieves economic value by optimising resources through operational excellence. But , with staggering accumulated losses, and a change in ownership forced by lenders, the vision is a hazy mirage.
Ispat has been choking on debt since 2001, when the steel cycle dipped to one of its lowest levels and prices were just about enough to cover cost of production. Lenders came in and approved a corporate debt restructuring package, not just for Ispat, but for JSW Steel (then Jindal Vijayanagar Steel) and Essar Steel.
Both JSW and Essar emerged stronger and came out of debt restructuring in 2004-05. In fact, JSW is on the threshold of becoming the largest private sector steel producer in India after bagging Ispat. Apart from financial re-engineering, Ispat’s competitors used the years from 2001 to 2005 to agglomerate raw material linkages and capacity expansion.
“Expansion was given top priority. Growth is essential, not just to become a number one player, but to ensure stability — especially during downturns,” said Sajjan Jindal, vice-chairman & managing director, JSW Steel. JSW ramped up production and, with forward integration through a merger with Jisco, it became a completely integrated steel plant.
Essar Steel’s rebound was just as robust. “We expanded capacity to 4.6 million tonnes by 2007 and our downstream facilities were in place, too. On the raw material side, we had a joint venture with Stemcor and eventually we bought it,” said an Essar Steel official.
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Did the Mittal brothers fail to spot opportunities ahead of the curve? Ispat Industries Executive Vice-Chairman Vinod Mittal insists that the plant in its current form is just about five years old. “Our hot strip mill project was completed only in 2005,” Mittal said.
There were structural deficiencies, too. Ispat did not have the raw material linkages. “When we conceived of the coke, power and pellet projects, the financial crisis set in. That was another setback,” Mittal explained.
Industry insiders believe that global ambitions took precedence. But plans in Libya, Bulgaria and Nigeria through Global Steel Holdings didn’t pan out. “These were plants that L N Mittal had looked at, but rejected,” a source close to Lakshmi Mittal said.
Always in the shadow of Lakshmi Mittal, Pramod and Vinod harboured global ambitions. Investments in Global Steel started flowing from 2003. The only problem, however, was that the younger siblings could not emulate the more successful Mittal’s strategy.
“L N Mittal has a core team of 10-11 people who helped turn around the plants he acquired, unlike others who first acquire and then look for people to manage. Also, L N Mittal acquired units that could be rehabilitated,” a Mittal family observer said.
That’s history. Vinod Mittal, who still has veto rights with 26 per cent in Ispat, is optimistic. So is Sajjan Jindal. Both see Ispat turning around in 12 months.
“We have already put in place the broad contours of our turnaround strategy. We will arrange key inputs like pellet, coke and power at a competitive cost in the short-term. We will bring efficiency in sourcing inputs. Within the next 24-36 months, we will infuse capex of around Rs3,000 crore, which will increase Ispat’s capacity to 4.2 million tonnes. We will construct coke ovens, a pellet plant and a captive power plant, which will go a long way to further reduce costs,” Jindal said.
But it also means JSW will have to invest in Ispat. “The company has recorded liabilities of around Rs18,000 crore, including the committed capex programme,” said an official from a company that had carried out due diligence, but later opted out.
| ISPAT PERFORMANCE in Rs cr | |||
| Particulars | Year ended Mar-09 | Year ended June 2010 (15 months) | Quarter ended Sep-10 |
| Current assets | 2,954 | 3,693 | 3,512 |
| Current liabilities | 3744 | 4,117 | 4,389 |
| Long-term debt | 6,932 | 6,943 | 6,783 |
| Total debt including preference capital | 8,403 | 8,185 | 8,040 |
| Less: Accumulated losses | 1,832 | 2,134 | 2,466 |
| Adjusted net worth | 934 | 559 | 207 |
That’s only if the company has studied the contingent liabilities, JSW Joint Managing Director & Group CFO Seshagiri Rao said.
The liabilities were larger than the plant. Could lenders have pulled the trigger earlier? An official from IDBI, the leader lender, says, no. “It was a stressed asset, but it had not defaulted on payments,” he said.
Yet, it’s the lenders with an exposure of Rs9,500 crore that are most relieved with the JSW-Ispat deal. Had it not been closed by December 25, Ispat would have been a non-performing asset on their books. As a source close to development put it: It’s a deal that saved the Indian banking system.