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The Indian lenders led by the State Bank of India are looking at at the option of changing the Electrosteel Steels’ management with a new promoter, after the company is finding it difficult to repay its loans. Banking sources said Electrosteel, which made a Rs 624-crore loss in FY15, will be the first company that might see a change in management after the promoters failed to turn around the company even after a generous corporate debt restructuring scheme.
An SBI Group executive said Electrosteel is still a standard account. “Many companies in the steel sector are facing tough times due to factors like low demands and project delays. The situation is fluid about this case. The CDR (corporate debt restructuring) provides lenders rights to convert some loans into equity,” he said, requesting anonymity.
Another source at Bank of Maharashtra, which has small exposure to the company, said present CDR agreement provides for conversion of part of debt into equity which might give controlling stake to lenders. “The CDR pact does not have a clause for shareholders’ approval beforehand for lenders to acquire majority holding,” he said.
A Electrosteel official said they are in talks with the lenders. “The lenders are evaluating two offers, one from Tata Steel and the other from a Singapore-based investor. The offer, if it materialises, would entail a change in management. Whether we will remain invested depends on whether the new investor would want our help,” said Umang Kejriwal, director and promoter. The lenders’ action comes in the backdrop of sagging financial metrics of the company. In the year ended March, Electrosteel said its expenses were 10 per cent higher from the net sales of Rs 1,831 crore. Net sales in FY15 rose more than three times but were unable to beat high expenses, a case similar to 2013-14 (April-March).
This apart, the finance cost was more than double on a year-on-year basis, at Rs 451 crore in the period. Due to this, the loss of the company had widened in the year gone by to Rs 624 crore, from Rs 291 crore in the corresponding period a year before.
The company’s shares traded flat at Rs 3.86 on the BSE today with a total market value of Rs 929 crore. The promoters own 45% stake in the company.
Electrosteels Steel is not the only company to go through a crisis. The steel sector globally is going through a crisis. Chinese HRC (hot rolled coil) prices have hit 16-year lows, while benchmark CIS and China HRC export prices are at 10-year lows. At present, steel imports are currently at 15% of monthly consumption which is hitting the local players. Analysts say in India most players would not have been able to pay the interest, other than the top three TATA, SAIL and JSW who would remain profitable even if current prices were to sustain.
Another impact of falling steel prices will be on the banking sector which has lent close to Rs 300,000 crore to the sector. Nudged by the banks, the steel companies are resorting to asset sales; refinancing of local loans with dollar loans and are taking advantage of the Reserve Bank of India’s 5/25 scheme as rising debt cripple their balance sheets.
