Tatas, JSW Possible White Knights For Stressed Steelmakers, Says Rakesh Arora

Tata Steel Ltd. and JSW Steel Ltd. are probably the only two Indian companies in a position to acquire the distressed assets of their loan-defaulting peers in the sector, said Rakesh Arora, market expert and a long time watcher of the metals sector.

The Reserve Bank of India last week identified 12 large accounts, contributing a quarter of the Rs 7.7 lakh-crore bad loans in India’s banking system, for resolution under the Insolvency and Bankruptcy Code.

Bhushan Steel Ltd., Monnet Ispat & Energy Ltd., Electrosteel Steels Ltd. and Essar Steel are among the dozen companies identified by the central bank, four bankers in the know had told BloombergQuint. In total, five firms in the steel business, including Bhushan Power and Steel, are part of the list, BloombergQuint reported.

With a capacity of roughly 22 million tonnes, these five form about 17 percent of India’s total steel capacity, said brokerage house Credit Suisse in a report dated June 21.

Assets of troubled steelmakers can be absorbed but at a right price, said Arora in a phone interview with BloombergQuint.

Credit Suisse estimated that the average haircut needed would be at about 56 percent, given the unsustainably high debt.

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Financials of most steelmakers remains weak, Arora said. Barring Tata Steel and JSW Steel, the other two major steelmakers – Steel Authority of India Ltd. and Jindal Steel & Power Ltd. – reported losses in the year ended March.

Credit Suisse added that these firms could potentially benefit from consolidation at this stage. Tata Steel and JSW Steel are already operating at utilisation levels above 90 percent and planning expansions, said the brokerage house.

“Acquisition of these capacities can raise the share of the major-4 (including SAIL & JSPL) to 60 percent of the domestic industry capacity. In the flats segment, the major-4 could reach an oligopolistic 90 percent plus share,” the report added.

To be sure, neither Tata Steel nor JSW Steel have expressed an interest in such acquisitions. The state-run steelmaker is out of the fray. Steel Minister Chaudhary Birender Singh on Tuesday ruled out any possibility of SAIL taking over debt-ridden Monnet Ispat & Energy, newswire PTI reported.

BloombergQuint is awaiting responses from individual companies.

While these companies are better placed than some of their stressed peers, they, too, have a large pile of debt.

The top four steel companies by market capitalisation – Tata Steel, JSW Steel, SAIL and Jindal Steel & Power – reported a total debt of more than Rs 1.98 lakh crore in the year ended March. Both Jindal Steel & Power and SAIL reported losses.

Tata Steel and JSW Steel managed to reduce their debt by 4 percent and 7 percent, respectively. SAIL’s debt, however, rose 13 percent year-on-year. SAIL also has the highest leverage, with a net debt-to-earnings before interest, tax, depreciation and amortisation ratio of 580 times.

More than half of the steel sector’s debt is with companies with debt-to-EBITDA of more than 12 and those having interest coverage of less than one, said a separate corporate health tracker report released by Credit Suisse earlier this month. A measure of a company’s ability to make interest payments, an interest coverage ratio of one or more means that the entity can cover the cost of debt for the year.

Repairing the balance sheet of steel companies would at least take a few years and the sector definitely doesn’t seem to be entering the bull cycle given the large overcapacities globally, said Arora.

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