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Bhushan Steel, in the centre of a storm over recent days, has seen its stock fall from Rs 381 on August 5 when its vice-chairman and managing director, Neeraj Singal, was arrested in the Syndicate Bank bribery case, to Rs 152.50 currently. For the past eight trading sessions, the stock has been locked in the lower circuit. The market capitalisation has fallen Rs 5,200 crore, taking the current value to only Rs 3,454 crore for a company that has 2.7 million tonnes per annum (mtpa) of operational steel manufacturing capacity and is in the process of commissioning another 2.5 mtpa by the end of the current financial year.
It is unclear whether Bhushan is a steal at these levels or whether the market was earlier overvaluing the company. The expansion plans of peers provide some e answers.
Recently, referring to the government’s plan of taking India’s steel-making capacity to 300 mtpa by 2025, a senior industry official had said it took about $1 billion (Rs 6,000 crore) to build one mtpa capacity. Giriraj Daga, senior research analyst, Nirmal Bang Institutional Equities, seconds the view. A one mtpa expansion costs Rs 3,000-4,000 crore but a new project costs more, given the need for setting up allied infrastructure. In January, government-owned Steel Authority of India Ltd (SAIL) said it would expand its capacity to 24 mtpa, by adding 10 mtpa at a cost of Rs 60,000 crore. And, that further expansion to 50 mtpa by 2025 would cost Rs 170,000 crore or Rs 6,500 crore per mt.
Consider Tata Steel, which in two phases is building a six mtpa plant at Kalinganagar in Odisha’s Jajpur district. The first phase of three mtpa is expected to be commissioned by the end of FY15 and to cost Rs 26,000 crore. Although the cost had increased owing to delays due to land acquisition problems in earlier years, it also includes cost of allied infrastructure such as rail links, raw material, etc, say analysts. The second phase of three mtpa expansion is estimated to cost Rs 12,000- 14,000 crore. These estimates peg Bhushan Steel’s value at Rs 31,200-33,800 crore, based on Rs 6,000-6,500 crore as the cost per mt and an estimated steel capacity of 5.2 mtpa. These numbers are almost equal to the Rs 32,340 crore the company is spending on the Phase-III expansion project. Of this, it had already spent Rs 27,100 crore by the end of the June quarter. The existing 2.7 mtpa capacity is also worth a good amount. However, among the keys to profitability is backward integration (coal and iron ore mines) initiatives, which in Bhushan’s case are still to see the light of day.
Beyond these capacities, the company stands out due to its value-added products portfolio, which caters primarily to the needs of automobile and white-goods makers. It manufacturers these with the help of technology sourced from Sumitomo of Japan and tie-ups with Hitachi and Kusakabe (both of Japan), GFG and ATMC (of USA), etc. With 18 distribution and processing centres across India, the company claims to have quite a few marquee clients.
These also suggest there are hard assets in the company. Thanks to its aggressive growth plans, the consolidated net sales have grown at a compounded annual rate of 14 per cent in 10 years. The Ebitda (earnings before interest, taxes, depreciation and amortisation) margins have remained healthy at 25-28.2 per cent in the past five years, and so have consolidated net profits, with the exception of 2013-14, when net sales dropped 10 per cent and net profit by 93.5 per cent to only Rs 59 crore from Rs 907 crore in FY13. The last two quarters of FY14 saw a loss of Rs 58 crore and Rs 20 crore, respectively; the June quarter of 2014-15 also saw a higher loss of Rs 142 crore.
The bigger problem, though, is the debt on the company’s books, of Rs 36,000 crore. It takes the enterprise value to around Rs 40,000 crore. Over these years, debt levels have also surged from just under Rs 12,000 crore in 2009-10 to Rs 35,380 crore in 2013-14— the debt-equity ratio was a high 3.86 in 2013-14.
With deteriorating financial performance, it might become difficult to service debt obligations, say analysts. The arrest of its vice-chairman has added to the woes. Though the company’s board has approved plans to raise funds up to Rs 6,000 crore in phases, the sharp fall in valuations suggest this might not be easy. Unless the promoters, who hold 71.3 per cent stake (most of it being pledged) are able to cough up large resources or are able to get along a strategic partner or investor, the going will be difficult. The option is to significantly improve the performance in the next three to four quarters, so as to be able to repay short-term liabilities. Estimates peg the debt repayment at Rs 2,500 crore for FY15 and a similar amount in FY16.
A fund manager says there is an element of doubt over prospects. That there are allegations of bribery suggests problems in either accounting or other issues. “For us, any stock which is tainted is better avoided,” he adds. While there might be value in the stock, given the sharp decline, experts are advising caution. Says Alex Mathews, head of research, Geojit BNP Paribas Financial Services, “Until clarity emerges, it is prudent that investors avoid Bhushan Steel’s stock.”
Some do see an opportunity. Giriraj Daga, adding strict caveats, says, “Bhushan Steel is high-risk, high-reward for investors looking from a two-three years’ perspective but only below Rs 100 levels. While we are expecting the steel industry outlook to improve, we don’t know how big the hole is in the books of Bhushan Steel. On an enterprise value basis, its value should be Rs 42,000-45,000 crore, looking at the gross block and the capital work-in-progress. We believe it will be difficult for existing management to revive, as rating agencies have also downgraded the debt. Bankers have limited options but to take over the company and sell it to a third party who will bring in money.”
Experts say stock will be under pressure in the near term. The good part, though, is that Bhushan is still a standard asset for banks, as it has not defaulted on its obligations. However, time seems to be running out.
