 "A worker stacks steel pipes in Ahmedabad")
On February 5, the government imposed a minimum import price (MIP) ranging from $341 - $752 a tonne, on certain steel items that will finally translate into higher prices with the halt of cheap imports. So far, other measures by the government hadn't yielded much. Since September, which is when the government imposed a safeguard duty, prices have dropped by Rs 8,000 a tonne, ex-plant. Capacity utilisation too had dropped from around 80% to 72%.
The gloom has reflected as much on the balance sheets of steel companies as it has of the banks, unsurprisingly though. According to a presentation by the Indian Steel Association to the government, as of September 2015, the steel sector accounts for 21% of total number of corporate debt restructuring cases having an aggregate of Rs 56,000 crore. The sector's share in total stressed accounts of scheduled commercial banks is 10-11%.
Steel producers say that there is potential for an increase in prices of upto Rs 10,000 a tonne over the next few months. Already prices have increased by Rs 1,000-1,500 a tonne.
"The MIP regime is expected to improve the margins and capacity utilisations of stronger domestic steel players. However, the extent of margin improvement is unlikely to be sustained over the medium term, given the likely demand-supply mismatch in the domestic industry at current demand growth rates, expectation of weak steel prices in international markets and a limited validity period of six months initially for MIP," an ICRA report said.
Increased cash flows would help the companies in making some payment of outstanding dues "There are two parts - deferment of repayment schedule and interest payment. The MIP will help in interest payment," explains Bhushan Steel Director Finance, Nitin Johri.
Bankers have extended the repayment schedule for Bhushan Steel under the Reserve Bank's 5/25 scheme which allows the repayment period to be stretched up to 25 years, with periodic refinancing every five years.
Companies where strategic debt restructuring (SDR) scheme -- which \allows lenders to take control of defaulting companies -- have been applied are hopeful of better times with varying degrees. An Electrosteel Steels official said that finished product prices would go up while VISA Steel Chairman and Managing Director, Vishal Agarwal said that from a zero to negative EBITDA (earnings before interest, taxes, depreciation, and amortisation) level it was likely to improve to a marginally positive EBITDA.
Bankers are of the view that minimum import prices of steel will have a positive impact on the companies under SDR. However, long term sustainability of prices is key to long-term revival of the sector.
"Valuation may improve, but not so sure at this stage because as of now, this is a temporary measure,"' said Rajnish Kumar, managing director (National Banking Group), SBI.
MIP is in place for six months but it will be up for review after two months.
"If minimum import price is there for a longer tenure, it will help attracting new investors. It is a well-known fact that the quality of Indian products is better than that of Chinese products. So even if Indian prices are slightly higher, the buyer will choose Indian products over the Chinese products, which in turn will help the debt-laden steel companies," an official of a public sector bank associated by SDR said.
"As a short term measure, the valuations of steel companies will improve. If the measure to have a minimum support price is sustained in the long-term, it will be definitely be helpful for getting new investors under SDR,'' said Vibha Batra, Group Head - Financial Sector Ratings, ICRA.
