The domestic steel sector has turned out to be one of the major beneficiaries of the Insolvency and Bankruptcy Code (IBC). Out of the 40 large defaulting accounts identified by the Reserve Bank of India in June and August 2017, 11 entities belong to the steel sector. As per ICRA report, eight out of these 11 companies have steel manufacturing capacities totalling about 23.8 mn metric tonnes per annum (mtpa) forming about 18% of the total domestic steel capacity.
Abhishek Dafria, Vice President & Co-Head, Corporate Ratings, ICRA says “The steel sector has provided an impetus to the IBC with four large corporate debtors having already completed the corporate insolvency resolution process (CIRP) yielding a resolution plan. The financial creditors have realised close to Rs44.4cr from these four CIRPs with an average haircut of about 47%. The realisation for the financial creditors would have been even higher, but for the delays seen in concluding the CIRP for two large entities, viz. Essar Steel Limited and Bhushan Power and Steel Limited, both of which have attracted interest from domestic and foreign entities. These two entities have been enveloped in legal wrangles due to which their CIRPs have now exceeded 500 days. We expect both the CIRPs to be concluded some time in 2019, which should help the financial creditors realise at least an additional Rs. 60cr.”
Further, as per ICRA note, the turnaround seen in the steel sector over the past couple of years, following the imposition of trade remedial like minimum import price and anti-dumping duty on certain steel products by the Central Government, along with the increase in international steel prices, have been crucial in reviving bidders’ confidence. The stressed assets in the sector make for good candidates for acquisition by other large players who are looking to improve their market share and cater to the favourable domestic demand. Acquisition of these debt-ridden companies would provide the stronger entities with operational plants that would immediately contribute to their operating profits, compared to the setup of a greenfield project, which typically would have a gestation period of three to four years at least.
Priyesh Ruparelia, Vice President & Co-Head, Corporate Ratings, ICRA comments, “As per our estimates, the combined plant utilisation of the stressed assets was about 72% during FY18. With successful acquisition of these assets by new promoters under IBC, the capacity utilisation could be ramped up to 90% within the next two-year period which would improve the domestic supply position.”
As per ICRA, it is assumed that the domestic steel consumption will grow at a CAGR of 7% during 19-22 period, in line with the healthy demand growth in 2018 and in the current year, the requirement of steel in India goes up from 91 mt in 18 to 119 mt in 22, implying incremental volumes of around 28 mt. Now, even if the upcoming capacity expansions of about 19 mt announced by existing players to come on-stream at 90% capacity utilisation is considered, there would be a supply deficit of about 10.9 mt, which would have to be met through imports. The import requirement therefore would be significantly higher than the levels seen in recent years, with 7.5 mt of steel imports reported in 2018.
“In such a scenario, the improvement in capacity utilisation of the stressed assets to 90% levels would help in reducing the steel supply deficit to 6.6 mt from 10.9 mt in 2022. Hence, we feel that successful resolution of stressed steel assets under the IBC mechanism would be crucial to contain India’s dependence on steel imports in the medium term,” concludes Ruparelia.
Source: IIFL, February 26,2019