The National Company Law Tribunal (NCLT), on Thursday, approved JSW Steel's Rs 19,700 crore bid for acquiring bankrupt Bhushan Power and Steel (BPSL), after two-year long insolvency proceedings. However, the verdict came at a time when the steel industry is eyeing at the production cut and cost reductions as domestic economic slowdown started affecting its profitability. Industry experts fear that the acquisition may spike the debt of JSW Steel to alarming levels.
JSW Steel had a net debt of Rs 47,800 crore at the end of June 2019. "The present capital expenditure requirement of Rs 31,000 crore and Rs 19,700 crore acquisition of BPSL may increase the debt to an alarming level. If the company raises 70 per cent of these capital requirements through borrowings, the net debt will go up by Rs 35,000 crore, taking the total debt to around Rs 83,000 crore," industry experts said. The margins of steel companies are falling amid slowdown and global trade war fears, they added.
Seshagiri Rao, Joint Managing Director and Group Chief Financial Officer, JSW Steel, recently (before NCLT's BPSL verdict came out) told Business Today, "India is an infrastructure deficit country and the domestic demand will remain strong in the long-term. We have huge population and the aspiration of the society is high. That is why we target to become a 45 million tonne (MT) steel company by 2030."
JSW Steel has invested Rs 17,000 crore in the last two financial years for expanding its steel production capacity organically. Rao said that they plan to invest Rs 15,000 crore in this financial year and another Rs 16,700 crore by next financial year for capacity expansion to 24 million tonne (MT) from 18 MT. The expansion project has been targeted to complete by March 2021.
"We are more or less tied up for the funding of the capital expenditure. This year, we have done bond issue, taken foreign currency as well as rupee loans and received advances from customers for funding the project," he said. In February, JSW Steel raised $500 million by issuing offshore bonds.
Rao also said that they are cautious about the debt. "We have brought down our net debt to EBIDTA to 2.72 times in the quarter ended June from 6.44 times in FY16. We will not go beyond 3.75. We have enough headroom available, but will be cautious in ratios," he said.
In the last financial year, the company had an EBIDTA of Rs 18,800 crore and Rao said that this cash flow is enough to meet its requirement. "We have expertise in building 1 MT steelmaking capacity at a cost of Rs 3,500 crore, when competitors spend Rs 6,000-7,000 crore for the same. So, our interest and depreciation are lower," he said. However, the BPSL bid price of JSW Steel indicates that the buyer will have to spend Rs 5,600 crore for one million tonne capacity of the bankrupt firm.
With the acquisition of 3.5 MT BPSL, the overall capacity of JSW Steel will go up to 22.8 MT from 19.3MT. JSW alone has capacity of 18.1MT and it increased to 19.3MT after the acquisition of another bankrupt company Monnet Ispat. JSW Steel-Aion Investments combine had acquired Monnet in September last year at a cost of Rs 2,875 crore. They are investing about Rs 1000 crore to expand its capacity to 2 MT from 1.2 MT.
Tata Steel is another private steelmaker which has gone aggressive in the Indian market with the acquisition of two assets - Bhushan Steel (5.6 MT) and the 1 MT steel business Usha Martin - in the last financial year. Its capacity shot up to 19.6 MT because of acquisitions, which together cost over Rs 39,000 crore.
BPSL has its upstream steel manufacturing plant in Jharsuguda, Odisha, besides two downstream units in Chandigarh and Howrah. With the Monnet plant in Chhattisgarh, JSW Steel will strengthen its presence in the central and eastern part of India, where Tata Steel has its entire capacity - Jamshedpur (West Bengal) and Kalinganagar (Odisha).
JSW Steel, last year, announced an investment of $1 billion in the US for the backward integration of existing plates and pipe mills facility in Texas as well as in buying Ohio-based steel plant, Acero Junction Holdings. It had also acquired Italian steelmaker Aferpi for Rs 441 crore.