Stressed steel plants1acquired under the Insolvency and Bankruptcy Code (IBC) resolution process in India are seeing faster returns. Despite pandemic-linked blips, domestic demand outlook remains strong, helping acquirers ramp up utilisation levels, according to rating agency CRISIL.
The steel plants acquired via IBC process include Bhushan Steel, Essar Steel, Electrosteel Steels, Monnet Ispat & Energy Ltd and Bhushan Power & Steel.
The ongoing steel upcycle will also mean stronger-than-expected realisations over the medium term. Consequently, acquirers may see about 20 per cent faster payback and are well set to tap the brownfield potential housed under these assets.
The five stressed steel capacities, totalling 21 million tonne (MT), were acquired mostly by other primary steel producers.
These assets accounted for 70 per cent of total financial claims resolved or liquidated under IBC in the steel sector till March 31, 2021. They had total financial creditor claims of Rs.1.7 trillion. These were resolved under the IBC process between fiscal 2018 and 2021 with nearly 60 per cent of the total claims paid by the acquirers.
For acquirers, the debt inherited via acquisition became sustainable after the haircuts. Also, turnaround in operational performance led by improved efficiency was the key for a reasonable payback period of around six years, given average domestic steel prices of approximately Rs 39,000 per tonne in fiscal 2018.
Expectedly, the acquirers have been able to turn these capacities around — utilisation rates improved from 65 per cent in fiscal 2018 to more than 80% by the end of fiscal 2021 — riding on operational debottlenecking, improved raw material sourcing, access to working capital and strong managerial oversight.
A bigger boost, though, has come from the current steel upcycle. Global steel prices have rallied strongly driven by strong demand and higher iron ore input costs due to supply tightness.
Domestic steel prices, which are driven by the landed cost of imports, have also witnessed a similar surge – at 15 per cent higher in fiscal 2021 compared with fiscal 2018.
Manish Gupta, senior director, CRISIL Ratings, said domestic iron ore prices have increased. But a combination of higher steel prices and better utilisation rates, with operational debottlenecking, lifted operating margins for the acquired assets from nearly 13 per cent in fiscal 2018 to around 22 per cent last fiscal. This is expected to be even stronger at around 30% this fiscal.
Despite some moderation, global prices could remain well above 2018 levels even next year. That is primarily due to China’s continued focus on reducing carbon emissions, which should keep a leash on global steel supply. The upshot of all this is that paybacks for acquirers of the stressed assets will reduce by up to 20 per cent, from around six years to less than five years, CRISIL added.
Business Standard has always strived hard to provide up-to-date information and commentary on developments that are of interest to you and have wider political and economic implications for the country and the world. Your encouragement and constant feedback on how to improve our offering have only made our resolve and commitment to these ideals stronger. Even during these difficult times arising out of Covid-19, we continue to remain committed to keeping you informed and updated with credible news, authoritative views and incisive commentary on topical issues of relevance.
We, however, have a request.
As we battle the economic impact of the pandemic, we need your support even more, so that we can continue to offer you more quality content. Our subscription model has seen an encouraging response from many of you, who have subscribed to our online content. More subscription to our online content can only help us achieve the goals of offering you even better and more relevant content. We believe in free, fair and credible journalism. Your support through more subscriptions can help us practise the journalism to which we are committed.
Support quality journalism and subscribe to Business Standard.