 "Bhushan Steel, Electrosteel may seek strategic investors")
After the Ruias-promoted Essar Steel announced it was seeking a strategic investor to pare its debt, brokerages said more domestic steel companies could follow suit.
With half the local steel industry caught in a debt trap and the business outlook grim due to a global steel glut, some of the country’s large steel companies could meet the fate of Essar Steel in the coming months, brokerages said.
Debt-ridden Tata Steel, the Sajjan Jindal-led JSW Steel, the state-owned Steel Authority of India (SAIL), Jindal Steel & Power and Bhushan Steel are among India’s largest steelmakers with most having capacities above 10 million tonnes.
The Mumbai-headquartered Essar Steel last week announced it was scouting for a strategic investor to raise money for capital expenditure and to pare some of its debt. Essar Steel’s consolidated net debt on March 31, 2015, was Rs 34,928 crore. In the last financial year, the company had managed to turn around after five years during which interest costs were eating into weak operating profits and leading to losses.
Brokerages saw the Neeraj Singhal-led Bhushan Steel as the next to be impacted by the industry’s down cycle. The company, which received its lenders’ nod for refinancing debt in the 5/25 scheme--where banks can extend loan repayment periods up to 25 years, with an option of refinancing the loan every five years--could be ripe for strategic investors. Bhushan Steel had last year struggled to make operating profits, according to analysts.
“Bhushan Steel is a good asset to invest in, but if it plans to acquire a strategic investor the company will have to sell stakes at a deep discount,” said Giriraj Daga, portfolio manager at SKS Capital & Research.
“Which investor would like to invest in a market like this? Investors cannot change the industry situation. The problem is with the entire industry, not just the company,” said Nitin Johari, chief financial officer of Bhushan Steel. “We do not wish to comment whether we are looking for a strategic investor,” he added.
Electrosteel is another loss-making company that could look for a strategic investor to lower its debt. The West Bengal-headquartered company has a 2.5-million tonne Chinese steel facility in Jharkhand and net debt of Rs 10,000 crore as on March 31, 2015.
The company has been allotted an iron ore mine that is awaiting clearance from the Jharkhand government. For overseas investors seeking access to Indian natural resources, Electrosteel Steels could be attractive if they were prepared to deal with its debt, brokerages said.
Most brokerages ruled out Jindal Steel & Power, Tata Steel or JSW Steel taking on strategic investors to lighten their balance sheets.
“Jindal Steel & Power's operating profit has been able to pay the interest so far and to that extent the company is not in a desperate situation to acquire an investor,” said Pritesh Jani, analyst, Religare Securities.
With its debt-equity ratio close to 2 on March 31, 2015, Jindal Steel & Power’s top line has remained stagnant for the past three years. Although expenses bloated in the year gone by, the company has been able to comfortably service its debt. Jindal Steel & Power was unavailable for comment ahead of its September quarter results.
JSW Steel seemed best positioned among its peers with a relatively strong balance sheet, analysts said. The company has managed to grow its revenue continuously. When steel companies across the globe have become risk-aversive, JSW Steel has been cautiously opportunistic and looking to grow inorganically.
“Our balance sheet is strong and in a market of this kind, JSW Steel has capital expenditure planned as well. We do not wish to comment further,” said the JSW Steel spokesperson.
Japan-based JFE Steel Corporation holds a 15 per cent stake in JSW Steel. JSW Steel is the only company among the country’s top steel makers whose market capitalisation has remained stable, unlike others that have witnessed heavy erosion since the end of March 2015.
Tata Steel, India’s largest steel producer, with the highest consolidated net debt among large steel players, would never seek a strategic investor, brokerages said. “There is no need for Tata Steel to do anything like Essar Steel as the company has valuable stakes in other group companies, which can bail it out if the need arises,” said Daga of SKS Capital & Research.
Tata Steel holds 24,400 shares of Tata Consultancy Services, one of the top performers among Tata Group companies. In comparison, Essar Group companies are struggling. Essar Oil, for instance, is selling its promoter stake to the Russia-based Rosneft to lower its debt. The group’s shipping business has been reporting losses for the past two years.
A Tata Steel spokesperson refrained from making any comments. “We do not wish to make any comments regarding strategic investments. Being a listed company, whatever it is, we have to first announce it to the exchanges,” the spokesperson said.
State-owned SAIL, with the lightest balance sheet among its peers, would also escape the strategic investor route, analysts said. “Though the company's employee costs are way above those of the industry and could create a problem for the company in coming quarters, SAIL being a government-owned entity will not meet the fate of Essar Steel,” said an analyst with a local brokerage. A mail sent to SAIL remained unanswered.
