Tough times prompt VISA Steel to think out of the box

The company is considering a merger and new partnerships to generate revenue

In 1994, Vishambhar Saran took everyone by surprise when he quit Tata Steel after a 25-year stint. He was director of raw materials then. VISA Industries (later renamed VISA Steel) was set up. The big leap for Saran came in 2003 when the company signed a memorandum of understanding (MoU) with the Odisha government for an integrated special and stainless steel plant at the Kalinganagar Industrial Complex. MoUs were also signed for plants in the mineral-producing states of Chhattisgarh and Jharkhand.

The going seemed good for a while. But like many other steel companies, VISA Steel is now mired in a financial crisis.

Last month, VISA Steel announced that the joint lenders forum had decided to invoke strategic debt restructuring (SDR) in accordance with the Reserve Bank of India circular dated June 8, 2015. SDR is invoked if the borrower is unable to achieve the viability milestones or adhere to "critical conditions" stipulated in the restructuring package. The debt on the company's books as on March 2015 was in excess of Rs 3,000 crore.

"In December 2003, we signed the MoU and started construction in April 2004. The blast furnace was commissioned a year later in March and a year after that came the coke plant," recalls Saran's son, Vishal Agarwal, who is the vice-chairman and managing director of VISA Steel. The ferrochrome plant, sponge iron and power plants, steel melt shop and rolling mill followed.

Expansion drive
Till 2004, VISA group was active only in international trading and the main products included chrome ore, iron ore, coal and ferro alloys.

Mineral-rich states like Odisha had by then become a magnet for investors when the commodity cycle was peaking in 2003-04. The state's message was simple and alluring: come and put up a plant and you will get mines. The criteria was that with 25 per cent investment, the mines would be recommended and with 50 per cent, the mines would be granted. In VISA Steel's case, this meant coal blocks, iron ore and chrome ore mines.

Companies flocked to Odisha in droves. As many as 50 investors, including ArcelorMittal and Posco, signed MoUs with the state that promised to put up a capacity of 79.82 million tonne at a cost of Rs 2.22 lakh crore. VISA Steel was one of the many.

Backed by the growth story, VISA Steel went for an IPO in 2006 to raise around Rs 200 crore. The draft red herring prospectus had, in fact, listed raw material linkages as one of its competitive strengths. "The government of Orissa through an MoU signed with us dated December 26, 2003 has assured grant of iron ore mining lease," read the document. That didn't happen.

Sometime in 2007, VISA Steel entered into a joint venture agreement with Baosteel Trading , China, and VISA Comtrade, Switzerland, for the ferrochrome project, which was to operate through a separate company called VISA Bao. Baosteel Trading is an arm of Baosteel Steel Group Corporation, one of China's leading steel companies, while VISA Comtrade is the international trading, shipping and logistics arm of the VISA group. At that point in time, India's steel story was shining. By 2010, however, the sector had lost its sheen when the Justice MB Shah Commission clamped down on mining.

"Iron ore production came down from 220 million tonne to 130 million tonne. There was an artificial shortage and prices were unviable," says Agarwal. "Obviously, margins were not sufficient to service loans, so we had to restructure loans. We raised money by selling stake in our coke business to SunCoke Energy." In 2013, VISA Steel entered into a joint venture with New York-listed SunCoke Energy, with the Indian steelmaker having a 51 per cent stake.

But it wasn't enough. The external factors worsened. The shared coal block - the only captive raw material linkage that it got - in which VISA Steel's share was 54 million tonne, was cancelled following the Supreme Court order in 2014.

"The sharp depreciation in the Russian rouble, combined with Chinese overcapacity, resulted in oversupply of cheap steel from China and Russia to the world market," says Agarwal. "This led to a global crash in steel prices, which aggravated the situation for Indian steel producers."

Agarwal explains that a steel plant of one million tonne requires a capex of at least Rs 6,000 crore, assuming interest cost of 12 per cent. The interest and equity servicing requires Rs 720 crore per annum or EBIDTA margin of Rs 7,200 per tonne of steel. A loan of Rs 4,000 crore (assuming a debt/equity ratio of 2:1) requires a margin of at least Rs 200 crore per annum or Rs 2,000 per tonne of steel to repay the loan over 20 years.

Steel is one of the most stressed sectors and VISA Steel is the second Kolkata-based steel company for which lenders have invoked the SDR. In July, lenders had taken control of the management of Electrosteel Steels.

Plans for VISA group's ferrochrome project also went awry. The chrome ore mines did not come through and prices for the contracts kept changing. "When we started, we were assured captive iron ore, chrome ore and coal mines. The rules of the game in the steel industry have completely changed as a consequence of which the industry is suffering," says Agarwal.

VISA Steel has already decided to merge VISA Bao with itself. VISA Steel holds a 65 per cent stake in VISA Bao, while Baosteel has 35 per cent. The merger would help consolidate the ferrochrome business, while bringing in cost efficiencies.

VISA Steel is also in discussion with lenders for preparing a conversion package to enable inviting a strategic investor in its special steel business, which will solve much of the company's problems. But with a subdued global steel scenario, this might not be easy.

According to the World Steel Association outlook released recently, the steel industry is now experiencing low growth. Agarwal is pinning his hopes on the government to extend the safeguard duty to the entire value chain, which, at present, is restricted to hot rolled coils. That could provide some succour, even if it is just for a short time.