Record steel prices help firms acquired under insolvency code out of red

A rally in steel prices to an all-time high has resulted in a stellar showing for bankrupt steel assets that were among the earliest to be auctioned under the Insolvency and Bankruptcy Code (IBC) in 2018: Tata Steel BSL (formerly Bhushan Steel) and JSW Ispat Special Products (formerly Monnet Ispat & Energy) and Vedanta-owned ESL Steel.

Tata Steel BSL has posted a profit of Rs 913.19 crore in the December quarter, its highest since its acquisition by Tata Steel in 2018. EBITDA per tonne at Rs 14,153 was an all-time high, ahead of market estimates. Tata Steel BSL had clocked a profit of Rs 341.71 crore in the September quarter, but December saw a quantum jump.

A Motilal Oswal report said the EBITDA was driven by higher-than-expected volumes and realisation. The latter improved 19 per cent quarter-on-quarter (Q-o-Q) to Rs 51,185 a tonne on higher steel prices and a better product mix, the report added.

Likewise, JSW Ispat Special Products achieved its highest quarterly EBITDA at Rs 152 crore in the third quarter after its acquisition by the consortium of AION, a fund management company, and JSW Steel in August 2018.

“The strength of the market and prices played a significant role in the third quarter numbers,” said Jayanta Roy, senior vice president, ICRA.

Domestic steel prices rallied to an all-time high in the first week of January with hot-rolled coils (HRC), the intermediate used for a range of industries from construction and automobiles for pipe-laying and gas cylinders, surging to Rs 58,000 a tonne, a 60 per cent increase from end-June 2020 levels. The increase was supported by a favourable domestic steel demand coupled with elevated global prices.

The groundwork to capture this upcycle, Roy pointed out, had started right after the acquisition. “The impact is now visible,” he said.

Consider this: When the AION-JSW consortium took over Monnet, the Raigarh operations — a 0.9 million tonne integrated steel plant — had been closed for over four years. When production revived, consistency was a problem. Monnet’s facilities are spread across Raigarh and Raipur in Chhattisgarh. Raigarh produces roughly half its output via the blast furnace route and the remaining by the direct reduced iron, or DRI, method, which directly reduces iron ore lumps or pellets to make steel. Raipur has 0.25 million tonne of DRI steelmaking capacity catering to the industrial construction segment.

At the time of the takeover, the Raigarh pellet plant was operating at 1.3-1.5 million tonnes; capacity has since been increased to 2.4 million tonnes, which is fully utilised. The additional pellets created from this capacity addition were sold in the market, generating additional revenues.

To bolster operations, the blast furnace, steel melt shop and oxygen plant were refurbished. Six DRI units with a capacity of 50,000 tonnes used to work at 35,000-40,000 tonnes a month. “We improved operations to 50,000 tonnes a month. Then we took a shutdown of the TMT operations, modernised it and converted it to specialty alloy steel, which has brought the advantage of higher realisations,” said Seshagiri Rao, joint managing director and group chief financial officer of JSW Steel. (TMT refers to a metallurgical process to produce products used in civil and retail construction.)

Unlike Monnet, Bhushan Steel was up and running when it was acquired. But operations and production have been ramped up since. According to Tata Steel’s 2018-19 annual report, crude steel production and sales stood at 3.58 million tonne and 3.57 million tonnes, respectively (installed capacity is 5.6 million tonnes). In 2019-2020, Tata Steel BSL achieved its best-ever crude steel production and sales at 4.46 million tonnes and 4.14 million tonnes on the back of improved maintenance practices, higher capacity utilisation and marketing synergies.

Tata Steel BSL and JSW Ispat were on the Reserve Bank of India’s first list of non-performing assets mandated for resolution under IBC. There were five steel assets on the list of which four have been resolved (Bhushan Power & Steel is mired in litigation in the Supreme Court).

Other assets such as Electrosteel Steels (now ESL Steel), now owned by Vedanta, are also in ramp-up mode. With the London-based major’s entry into the Indian steel sector with ESL’s acquisition in June 2018, a 1.2 million tonne plant in Jharkhand was commissioned and the capacity later ramped up to 1.5 million tonnes. The company turned in a profit after tax after eight months but was delisted in December 2018.

Pankaj Malhan, chief executive officer, ESL Steel, said, Q3 has been very good with all-time high production, deliveries and margins. “The major factors were market conditions and operating efficiencies,” he explained. There are plans to increase capacity to 2.6 million tonnes and debottleneck and take it to 3 million tonnes.

The quarterly financial numbers of ArcelorMittal Nippon Steel India (AM/NS India) are awaited. But the company has recorded a crude steel production of 1.8 million tonnes in the October-December quarter, an increase of five per cent YoY. 

According to ICRA’s latest metals sector outlook, the sector is poised to report its best annual performance in recent times as prices reach multi-year highs.  

Five steel assets on the RBI’s first list owed lenders about Rs 1,76,843. Two-and-a-half years on, the debt on the books of companies resolved under IBC has come down and the EBITDA has gone up. This is principally because these companies were able to ride the upcycle. The question is how well these formerly stressed assets will be able to withstand the inevitable correction.