In its financial stability report last week, the RBI had warned steel companies would not be able to service their
debt as
the infrastructure sector grappled with stalled and delayed projects.
The banks are worried about their over Rs 3 lakh crore exposure to the
steel sector, with the top 10 companies making up for the majority of
the loans (see chart).
Five of the top 10 private steel companies were under severe stress,
the RBI said. The companies say they are taking steps to reduce their
debt and intend to sell more assets in 2015-16. “The steel companies are
going through their worst patch. Unless they sell assets, it will not
be possible for many of them to repay loans,” said the chief financial
officer of a large steel company asking not to be named. “All companies
are in the same boat, and they have been told to either sell assets or
bring more cash to the table,” he added.
India’s most indebted steel company
Tata Steel has
announced plans to sell its long products division in Europe, but it
has not been able to close the deal because steel prices fell
internationally reducing the valuation of the unit. This week, Tata
Steel began talks with lenders to reduce its interest cost by 0.9
percentage points on a $1.5 billion loan taken last year. Tata Steel had
signed $1.5 billion term loans as part of a $3.1 billion refinancing
last year, bankers said.
The sector’s woes are low demand and falling prices. According to Emkay
Equity Research, CIS Export hot rolled coil prices continue to hover
around $365 a tonne because China is exporting steel at a cheaper price
and keeping global prices low. In India too, a 2.5 per cent hike in the
import duty did not have any impact on domestic prices because of poor
demand. Domestic steel prices fell by about 5-6 per cent during the past
three months, Emkay Equity said.
To help Indian companies to tide over the debt crisis, the RBI came out
with a 5/25 scheme that extends the tenure of loans to 25 years with an
option to refinance in five years.
Bhushan Steel and
Essar Steel have
opted for it. According to Essar Steel executives, the company reduced
its finance cost by 7.4 per cent to Rs 3,865 crore in 2014-15 from Rs
4,176 crore in 2013-14 and made a profit after tax of Rs 648 crore
against a loss of Rs 1,597.14 crore in the prior year. The company also
reduced its debt to Rs 30,000 crore by selling assets.
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“We want to strengthen the balance sheet through infusion of funds,
ramping up production, and improving profitability,” Firdose
Vandrevala, executive vice-chairman, Essar Steel India, said on May 27.
Essar Steel converted its local loans worth $2.2 billion to dollar
loans, thus lowering its interest cost. The Ruias also infused around Rs
1,300 crore equity and sold the Odisha slurry pipeline and oxygen plant
for around Rs 4,850 crore. The company was planning to sell the
Visakhapatnam slurry pipeline and coke oven for Rs 7,000 crore in
2015-16, executives said.
The lenders to Bhushan Steel have approved a debt restructuring plan
under the 5/25 scheme. The company with a massive debt of Rs 38,529
crore plans to ramp up capacity utilisation to 90 per cent from the
current 65 per cent to increase its topline so that it can repay its
loans.
One of India’s better managed steel firms, JSW Steel, with Rs 34,889
crore of loans on its books, does not foresee any problem with its
spiraling debt. Chairman Sajjan Jindal said the company’s margins were
strong to service its debt. “If you see the debt-to-equity and
debt-to-Ebitda levels in the sector, we are relatively the best,” said
Jindal in an interview to this newspaper.
