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Essar Steel's quest for strategic investors is more likely to find results abroad, as few would have the muscle to take a stake in the company in the current challenging business environment, said brokerages.
The company, part of the Ruias' group, announced on Saturday it was looking for entities to take a stake, to raise money for capital expenditure and to pare some debt.
"There will be investors who would want to buy but at what valuations is what matters. Given the situation the steel industry is in, valuations could come down significantly, by 30-35 per cent," said Giriraj Daga, senior analyst with SKS Research & Capital.
Brokerages have placed Essar Steel's current enterprise value at $6-7 billion (Rs 39,500-46,000 crore). The Mumbai-headquartered company has relatively young plants, with a 20 million tonne pellet capacity and 10 mt fully integrated steel producing capacity.
From strategic investors' perspective, investments of this kind are on a long-term basis and, hence, the grim business environment will not be a deterrent, said brokerages. However, most felt, Japanese or Korean investors are in a much better position to invest in companies like this.
"Japanese players are in much more stable financial health, compared to other investors across the globe," said Daga. "More, the cost of capital for Japanese companies would also be low, since funding would be in yuan. Their domestic borrowing would also be cheaper."
"We have conveyed the board's decision. We do not wish to make any further comments regarding this, as of now," a company spokesperson told Business Standard.
The brokerages also felt the Essar opportunity was ripe for companies like Posco of Korea, struggling to come to India since 2006 but without a positive outcome. The world's largest producer in the sector, ArcelorMittal, which has a small presence in India via a stake held in Uttam Galva, could also use this opportunity, they speculated.
Essar Steel has been preparing ground for such a move for some time, trying to strengthening its balance sheet. In 2014-15, it had significant improvement in performance by focusing on consolidation, enriching the product mix, reducing cost and stabilising operations.
Operating earnings grew 188 per cent as on March 2015 to Rs 5,389 crore as against Rs 1,868 crore in FY14.
It also reported Rs 648 crore of profit, from a loss of Rs 1,597 crore in FY14.
On the FY15 performance, Firdose Vandrevala, executive vice-chairman, Essar Steel India, had said: "(We) have completed all major projects at a competitive cost. The strategy to focus on value-added products, introducing new products, improved operating margins and cost saving has aided the improved performance."
According to reports, Essar Steel recently secured lenders' nod to refinance part of its Rs 38,000-crore debt under the Reserve Bank of India's '5/25' scheme. "It has taken the needed steps to turn around its business, despite the down cycle. Perhaps the company can perform better if a strategic investor comes in, with additional funding," said Abhisar Jain, senior analyst with Centrum Broking.
