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On November 11, 2013, the Bhushan Steel stock closed at Rs 504 on BSE. In less than a year, it has fallen 71 per cent to Rs 112, after touching a five-and-a-half-year low of Rs 87 this month.
Though the arrest of Neeraj Singal, the company’s vice-chairman and managing director, in the Syndicate Bank cash-for-loan scam a couple of months ago might have precipitated events, for the Bhushan Steel stock, it has been a steady decline since its high in November 2013. Bhushan Steel’s run on the bourses got a rude jolt on November 13, 2013, following an explosion at the slag pit during the trial run of a blast furnace at the company’s plant in Odisha. The blast killed two workers and injured 16.
Soon, the Odisha State Pollution Control Board directed Bhushan Steel to shut its blast furnace. It was only in May this year that the blast furnace, the sinter plant, the oxygen plant, the caster, the basic oxygen furnace and other ancillary equipment were again put to use.
The closure resulted in considerable loss of production. “The commissioning of the third phase of the 5.2-million-tonne (mt) capacity was delayed, which took a toll on finances,” the company’s whole-time director and chief financial officer, Nittin Johari, had told Business Standard during a recent interaction.
Bhushan Steel’s debt stands at Rs 40,000 crore, of which Rs 30,000 crore is a term loan. Of this, the short-term debt repayment obligations for FY15 are estimated at about Rs 2,500 crore, with a similar amount to be repaid in FY16.
Many believe the high debt can be attributed to the pact at which the company ramped up capacity at its Odisha facility. The first phase of expansion (0.3 mt) was completed in 2008-09, while the second (two mt) was completed in 2009-10. The third phase (5.2 mt) was commissioned recently.
To secure their interests, banks have clamped down on Bhushan Steel and a forensic audit has been commissioned. The company has been a concern for lenders for some time.
Consider this: At the end of 2013-14, Bhushan Steel had a high debt-to-equity ratio of 3.5. The ratio rises to about four if deferred tax liability and other liabilities are included. For 2013-14, the company’s net sales declined 10 per cent, while operating profit and net profit declined 18.3 and 93.2 per cent, respectively, compared to 2012-13. Interest costs rose 29.2 per cent to Rs 1,663 crore, accounting for 60 per cent of the company’s operating profit. In the past three years, the company’s net sales have grown 50 per cent, but its interest burden has more than tripled.
Alternatively, the company planned to sell and lease-back some critical assets such as the oxygen and coking coal plants. But even through this plan, Bhushan can, at best, raise Rs 1,000 crore in the near term.
Lenders have suggested the company consider exiting non-core assets, though there aren’t many of these.
Bhushan has controlling interest in Australian exploration company Bowen Energy, which has licences for coking coal, thermal coal and uranium. Selling the reserves partially, after securing Bhushan’s raw material requirements, is an option. But this, too, is unlikely immediately, as exploration is underway and estimates of the reserves will emerge only after nine months.
Bhushan Steel also has plants at Sahibabad and Khapoli, both cold-rolling facilities. With the completion of the third phase of expansion at the Odisha facility, Bhushan will be self-sufficient in its hot-rolling requirement, with a total capacity of 4.4 mt. As such, selling any of these assets might not be a good option. According to the company’s projections, it will end the year with revenue of Rs 16,000 crore. And, barring another bout of unfortunate circumstances, it hopes record revenue of Rs 22,000 crore next year.
Currently, however, what matters is profit and cash flow. This year, steel prices have seen some softness, owing to sluggish demand. In India, demand has increased only 0.7 per cent so far this year, estimates Motilal Oswal Securities. But monthly steel production has been rising 5-15 per cent since February this year. According to the brokerage firm, prices of TMT and HRC (ex-Mumbai) have fallen three-five per cent this quarter and 3-14 per cent year-to-date. The reason for the fall is weak economic data in China, the world’s largest consumer of steel.
That European economies are also facing growth pressures is not good news for the steel sector. Positively, input prices of coking coal and iron ore are down sharply (8-14 per cent in the quarter and 16-39 per cent year-to-date in 2014). If Bhushan is able to increase profitability, leading to an improvement in profits, it will help service interest costs and repay debt; else, its finances will see continued pressure. For the past three consecutive quarters, the company reported net losses of Rs 54.8 crore, Rs 19.6 crore and Rs 142 crore, respectively.
Analysts believe there is hope for the company. “Bhushan’s managing director has been released on bail, which is a relief. Now, it is crucial it does two things: First, it has to ramp up production. Though capacity expansion has not come at a good time, Bhushan Steel is capable of generating high Ebitda (earnings before interest, tax, depreciation and amortisation) per tonne, owing to its focus on value-added products. Last year, its Ebitda stood at about Rs 13,000 a tonne, which compares well with Tata Steel’s Rs 14,500,” said an analyst with a leading brokerage firm.
Therefore, the analyst adds, it is crucial for the company to ramp up operations, which will help generate profits and cash flow and reduce debt. The other aspect is how fast it is able to monetise non-core assets. “Bhushan will have to do a bit of everything — sale and lease-back of core assets, sale of non-core assets, possibly get a strategic partner, and ramp up operations,” he says. Though demand is soft currently, it is expected to recover by next year.
Clearly, Bhushan Steel has a lot to do. And, if the forensic audit throws up something adverse, it will only add to the company’s woes.
