The steel sector has turned out to be one of the major beneficiaries of the Insolvency and Bankruptcy Code (IBC), according to ratings agency ICRA Ltd. This could lead to improved plant utilisation and domestic steel supply. Out of the 40 large defaulting accounts identified by the RBI in 2017, 11 entities belonged to the steel sector. As per ICRA report, eight out of these 11 companies have steel manufacturing capacities totalling about 23.8 million metric tonnes per annum (mtpa) forming about 18% of the total domestic steel capacity.
Sharing his views Abhishek Dafria, vice president, ICRA said: “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.”
Financial creditors have realised close to Rs. 444 billion 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 caught in legal wrangles due to which their CIRPs have now exceeded 500 days. We expect both the CIRPs to be concluded some time in CY2019, which should help the financial creditors realise at least an additional Rs. 600 billion,” he added.
The turnaround seen in the steel sector over the past couple of years, following the imposition of trade remedials 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 ICRA note pointed out.
“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,” it said. 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, ICRA said
Priyesh Ruparelia, vice president, ICRA said: “As per our estimates, the combined plant utilisation of the stressed assets was about 72% during 2018. 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.”
Source: Economic Times, February 26,2019