Indian Steel Industry: An overview

• A century old industry which is the first core sector to be completely free from
the licensing regime and the pricing and distribution controls, has evolved in
production capacity to its consumption.
• It has become the third largest producer of crude steel in the world. For sponge
iron, India is the largest producer in the world with the coal based route
accounting for 90% of total sponge iron production in the country.
• Indian steel industry provides major cost advantage in domestic raw material
availability and cheap labour. In addition, presence of iron ore in abundant gives
an advantage to the industry. Currently, India is second after China in
consumption of steel.
• Advance licensing scheme allows duty free import of raw materials for exports in
India. Duty Entitlement Pass Book Scheme (DEPB) introduced to facilitate Indian
steel export. Under this scheme, exporters on the basis of notified entitlement
rates, are granted due credits which would entitle them to import duty free
goods.
Steel Players
• The industry have big players like SAIL and TATA Steel. SAIL is
a state owned public sector undertaking and India’s largest
steel manufacturer, on the other hand, TATA Steel has been
ranked as world’s sixth largest producer of the alloy as per
London based Iron and Steel Statistics Bureau.
• Lakshmi Mittal, Indian steel magnate,is the chairman and
CEO of Arcelor Mittal, has been emerged as the largest
producer with total production of 118 million metric tonnes
in 2006. Mittal steel has announced a 12 mtpa greenfield
steel project in Jharkhand and a 12 mtpa greenfield steel plan
in Orrisa in result of huge demand of steel in India.
• Indian steel industry is outreaching the global boundaries for
collaboration. Acquisition of Anglo-Dutch steelmaker Corus
by Tata steel making it world’s fifth largest steelmaker, is
starting a US$ 103 million project in South Africa. Jindal steel
eyeing on the stake in Thailand’s largest stainless steel
producer. Essar is collaborating with two state- run
Vietnamese companies to set up a US$ 527 million plant in
that country.
Bhushan Steel
• Bhushan Steel, formerly known as Bhushan Steel and Strips was
founded in 1987. It was one of the globally renowned leading
prominent players in the steel Industry. It was a merged entity of
Bhushan Industries Ltd., Bhushan Metallic’s Ltd. and Décor Steel Ltd.
• Brij Bhushan Singal, - a law graduate and the founder had a vision
whose first stake was driven into the soil of Sahibabad (Uttar
Pradesh). His son, Neeraj Singal, is Vice Chairman & MD of the
company. With over 20 years of experience in senior management
positions, he is believed to have given a new dimension to Bhushan
Steels.
Management Team
Bhushan Steel – The positives
• They were the first player in the country to make specialized steel for
automobile and white goods.
• Bhushan was the first Indian company to set up a Greenfiled steel making
plant in 15 years. They are the first Indian company to forge technical
alliances with Japan’s Sumitomo in 1996.
• It boasts of a series of gradual successes after its humble beginning in
1987. The company was doing very well in the 2000s, having neared the
pinnacle of success when it had commissioned two million tonnes (mt)
of capacity.
• They are key auto majors, suppliers for Maruti Suzuki, Tata Motors, M&M,
Bajaj Auto, Ashok Leyland, Ford and Honda. For white good majors, they
supply to LG, Samsung, Videocon, etc
 Bhushan Steel – The bad
• Zooming to zenith of success, Bhushan Steel ended up falling in a debt trap.
Their debt ratio was at a gradual rise from early 2000s to well above 2:1 by the
later part of it.
• Their stakes were put into the coal- bidding that was done. However, they
fell into trouble after the companies were alleged to have some illegal
dealings during the coal scam in 2012. This resulted in the de-allocation of
their coal blocks and also brought bad name for them in the market.
• Rampant debt dealings opened an unresolved maze of debt trap.The
Company began to find loan repayment difficult, thus emerging as
defaulters.
• Accused of bribing the Syndicate Bank CMD for an extension credit limits, the
Chairman of company Neeraj Singhal was booked thus leading to further
downfall of the company. SHORT TERM DEBT 1,046
LONG TERM DEBT 4,261
• SECURED (NON CONVERTIBLE DEBENTURES) 338
TERMLOANS 4,481
UNSECURED TERM LOANS (FOREIGN CURRENCY LOANS)
6
CURRENT MATURITYOF LONG TERM DEBT 564
TOTALDEBT 5,871
CASH & CASH EQUIVALENTS 14
NET DEBT 5,857
2003-2010
• “Bhushan Steel’s control over availability,
quality and cost of input steel was very
limited,” Neeraj Singal explained in the
company’s 2009-10 annual report. So in 2003,
they decided to build an integrated steel plant
in Odisha.
• “Banks were getting into project finance for
the first time,” a lender seeking anonymity to
speak freely. “If anyone questioned a project’s
viability, bosses would say - India will always
need cars, or there are millions of Indians
who still don’t have electricity.”
• Plant construction in Odisha began in 2005,
and the company was promised a ready
supply of iron-ore and coal needed to make
steel. The first phase of construction was
complete by 2009-10.
• Next year, elder brother Sanjay, broke away
from the family business, but Bhushan Steel’s
prospects were bright. But steel is a cyclical
business, and as Chinese demand tapered
after the 2008 Olympics, prices plummeted as
fast as they had once peaked.
• For Bhushan Steel, it was a gust of headwind.
• “The whole house of cards came tumbling
down,” said a financier seeking anonymity to
speak freely.
• “In a slowdown, steel demand in India doesn’t
drop. Prices do,” said the lender to Bhushan
Steel. “With debt you grow big fast, but when
bad times come, the debt suddenly becomes
a massive burden.”
2011-2014
• By 2010, Bhushan Steel was already shouldering loans worth
Rs 11,404 crore. Still, the company went on a borrowing
spree to finance the next phase of construction.
• By 2012, the steel industry was slipping behind on interest
payments as steel prices fell to $300/tonne that December
from a 2008 peak of $1265/tonne.
• “It was obvious that companies were borrowing from one
bank to pay off another,” the lender said.
• Banks were conflicted: pull the loans and book a loss, or keep
lending and hope the sector revived. Bhushan’s lenders
pinned their hopes on the Odisha plant reaching full capacity.
• In November 2013, the new plant’s furnace exploded during
testing, three workers were killed and 29 injured. The
accident was widely covered in the press. By March 2014, it
was clear the company was in trouble. Profit had shrunk to a
mere Rs 62 crore, while the company was spending more
than Rs 1,600 crore a year in interest payments alone,
according to Bhushan’s 2014 annual report.
• “Despite these challenges, your company’s bankers have
demonstrated continued confidence on the company,” the
annual report stated, noting that banks had extended almost
Rs18,000 crore in fresh loans and working capital. “Many
loans were secured against the company’s stock,” said the
financier, noting that the Singals owned 70% of the stock.
• Then on August 1 2014, the Centre Bureau of Investigation,
acting on a tip-off from a bank insider, said Bhushan Steel
allegedly defaulted on a Rs.100 crore loan repayment to
Syndicate Bank and allegedly bribed the bank chairman, S.K.
Jain for a credit extension.
• “Fresh credit was extended to M/s BSL by Syndicate Bank and
as a token an illegal gratification of Rs 10 lakhs was paid to
Shri Sudhir Kumar Jain,” said the CBI’s FIR.
2014-2017
• When Bhushan Steel was on the brink
of default in March 2014, SBI and a
consortium of lenders sanctioned
fresh loans. But as steel prices
remained stubbornly low, and
Bhushan’s interest costs escalated, the
company’s total debt rose 30% in two
quick years: from Rs 35,710 crore in
2014 to Rs 46,062 crore in March
2016, the annual report said.
• As defaults continued into 2017, a
business daily reported that the SBI-
led lender consortium asked Deloitte
India to conduct a forensic audit, and
authorised still more restructuring.
Synergies
Several synergies likely for Bhushan steel as Tata applies its best practices We expect several synergies at Bhushan steel led by
Tata steel’s application of its best practices on the overall management and functioning of the steel plant. We see several
natural and material benefits accruing in the below areas:-
• Sourcing of raw materials (especially coking coal) – We expect reduction in coking coal procurement cost by US$5-10/t as
Tata Steel has access to best in class cost metrics on account of its large buying at global level. Over long term, there is a
case for captive iron ore integration for Bhushan steel assets from Tata’s captive iron ore mines but we believe that this is
not an immediate trigger. Also BSL’s own iron ore mines have remained non-operational till now. Any quick movement on
getting clearances for sourcing a part of iron ore for Bhushan steel from Tata’s captive mines would be an additional
trigger.
• Reduction in consumables & additives – Tata has world’s best benchmarks in per tonne consumption of consumables &
additives at its steel plants. We expect savings in procurement cost of additives and consumables as well as possible
reduction in per tonne consumption ratios which could lead to cost savings in production.
• Operational efficiencies – We see strong scope of operational efficiencies as Tata would make efforts to increase the
capacity utilisation of the plant from 70% to 100% in the shortest possible period which we expect to be ~2 years. We
expect meaningful savings in labour, power and logistics front on per tonne basis led by economies of scale.
• Centralised marketing & sales – We also expect better market penetration & sales on account of access to Tata’s
centralised marketing & sales team.
• On a combined basis, we believe that synergy benefits could add ~Rs1000/t incremental EBITDA to Bhushan assets.