Bhushan Steel, with a large amount of debt in proportion to its equity (3.5 times more), is a highly leveraged company. The company’s consolidated debt stands at ₹31,839 crore, having risen 18 per cent from a year ago.

Over the years, the debt has risen steadily, sometimes at a faster pace than in the last year, as the steelmaker added production capacity. For instance, three-fourths of its Odisha plant’s ₹19,400 crore expansion programme (phase III) was debt-funded.

In the past, debt repayments did not matter as much for Bhushan Steel because its operations generated cash well in excess of what it had to pay by way of interest and loan repayments.

For instance, between financial years 2006 and 2010, while debt repayments ranged between ₹55 crore and ₹316 crore a year, cash from operations (profit after tax plus non-cash expenses) was much higher, at around ₹400 crore each year.

These were the years when Bhushan Steel clocked net profit growth at a compound annual growth rate of 53 per cent.

So, why has debt repayment become such a problem now?

The company’s problems began in 2010-11, when its debt repayment obligation more than trebled to ₹1,118 crore. This was probably because a part of the loans taken for capacity expansion, including for phases I and II of the Odisha plant, became due. Bhushan Steel’s operating cash flows of ₹994 crore, fell short of its debt-repayment obligations.

Problems on every front The situation worsened in 2013-14, with more loans becoming due. The company repaid ₹3,384 crore in 2013-14, double what it had the year before.

Debt repayments apart, Bhushan Steel’s rising interest burden, too, had become a nagging problem, shooting up eight-fold in four years to ₹1,663 crore in 2013-14. The company’s profit shrank 93 per cent to ₹59 crore during the same period.

A fall in global steel prices from their 2008 highs amid a glut did not help.

Bhushan Steel was consequently reduced to a position where its profit (before interest and tax payments) was just about enough to meet its finance cost.

Together, these factors played into the company’s desperation to prevent its loans from being converted into non-performing assets. Ultimately, they may have resulted in the bribery charges being framed against its top management as well as Syndicate Bank CMD SK Jain.

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