Of late, Sajjan Jindal-led JSW Steel made an offer to buy a controlling stake in Monnet Ispat & Energy Ltd through the strategic debt restructuring (SDR) route. It is just one of a series of bold moves announced by the company over the last few quarters, including a planned takeover of the distressed assets of Essar, Bhushan and even JSPL which is promoted by Naveen Jindal, brother of Sajjan.
This comes at the time when the steel and power companies are drowning in high debt balance sheet crises. The company’s group debt stands at a sizeable amount of Rs 44,000 crore. And yet, JSW seems keen to go ahead with its expansion plans that look quite ambitious in these times of gloom and doom for infrastructure companies. Why?
It is stated by the experts that the group, in comparison to its counterparts like Tata, Sail and Essar, is more efficient in terms of cash generation. The debt to equity ratio of the company stands at 1.5 and its improved financials helped come out of Credit Suisse’s infamous ‘House of Debt’ list, the only company to do so.
The health improvement of the steel companies could be attributed to government levying a Minimum Import Price and restricting cheap imports, especially for the flat product segment players.
Seshagiri Rao, Joint Managing Director and Group CFO, JSW Steel, was quoted saying in an interview that the company stood quite comfortable on debt even before its recent repayments. Along with reduction in debt, JSW Steel has seen a 25 per cent increase in production and sales with its 4 million tonnes capacity going on stream. In the first six months of last fiscal JSW Steel has registered an EBITDA of Rs 6,230 crore against the Rs 6,100 crore it logged a fiscal before that.
The company is undergoing SDR and lenders, who own 51 per cent stake, are exploring the option of handing over its control and management to outside investors.
JSW Steel has been on an acquisition spree. It has shown its interests in domestic steel companies like Bhushan Steel and evaluating some of the assets of Tata Steel UK with interests in stake pick up in Essar Steel as well.
The major problem over the last few years has been the mismatch of demand and supply in this sector. While the production capacity of the domestic players has been better than the average, there is a an ongoing struggle in the demand pickup. In 2015, India overtook US to become the third largest steel producing country. Therefore, for the performance of these companies, it is imperative for the demand to pick up.
The success of the takeovers by the JSW would lie in gaining scale and increase the demand for the commodity.
With major thrust on infrastructure and the National Steel policy 2017 vision, a consumption boom is anticipated by the experts, for which these companies need to be ready with their capacity. Therefore, JSW seems to be taking a calculated risk.
Can Sajjan Jjndal pull it off? The numbers suggest he just might. And yet, the history of such bold moves suggests it might just boomerang.
BW Reporters
Naina Sood is a Economics graduate and has done her post graduation in International economics and Trade. She has deep interests in Indian economy and reforms
