Satish Kumar, a worker with Electrosteel Steel, is a happy man as his life has changed for the better in a matter of three years. From being bogged by delayed salary and uncertainty over the future of his then employer, his fortunes have improved with the acquisition of the company in an insolvency process by Anil Agawal-led metal and mining giant Vedanta.

Kumar is among thousands of Electrosteel employees who have managed to rebuild their dreams in the steel city of Bokaro.

Not just Electrosteel but almost all the steel companies that were sold to large companies such as JSW Steel, Arcelor Mittal Nippon Steel India and Tata Steel have been turned around by their acquirers on the back of relentless rally in steel prices.

Improving utilisation

Five stressed steel companies (Electrosteel, Bhushan Power and Steel, Bhushan Steel, Monnet Ispat & Energy, and Essar Steel) with cumulative capacity of 21 million tonnes were put on sale by the lenders as of March-end. These assets accounted for 70 per cent of total financial claims resolved or liquidated under IBC in the steel sector, as per latest Crisil study.

The acquirers have turned around the assets and improved the utilisation level from 65 per cent in fiscal 2018 to over 80 per cent by end of last fiscal driving operational efficiency, better access to working capital and strong managerial oversight.

Despite pandemic-linked blips, domestic demand outlook remains strong, which has helped the acquirers ramp up utilisation levels. This apart, the acquired assets also have brownfield potential to almost double their existing capacities of 21 mt, which could get kick-started over the next one to two years given the strong demand outlook.

Naveen Vaidyanathan, Associate Director, Crisil Ratings, said fortunately for the steel sector, the pandemic has not derailed demand much. Last fiscal, after a complete washout in the first quarter, there was a sharp recovery that limited the decline in domestic demand to six per cent for the year. The demand growth in this fiscal is expected to grow 10-12 per cent, led by the auto and infrastructure segments and higher exports, he said.

Quick recovery

Interestingly, Electrosteel Steel itself has come full circle in less than three years since it was delisted from the exchange, and is now being proposed to be re-listed to unlock value.

Vedanta, which made its entry into the steel business and delisted Electrosteel by paying ₹9.54 a share, turned the company around in just eight months. In all, it paid ₹5,320 crore for the stressed asset in 2018.

When the company was dragged into insolvency in December 2017, Electrosteel was incurring a loss of over ₹900 crore and the financial lenders had put a claim of ₹13,395 crore, while that of operational creditors’ exposure was ₹782 crore. In the financial year ended March, 2021, the company recorded net profit of ₹2,732 crore by bringing down the operational cost and infusing fresh funds.

The company plans to kick off a project to double the capacity to 3 million tonnes from next March.

The case of JSW Steel’s acquisition of Bhushan Power and Steel is more interesting as the company has made a profit of ₹918 crore, even before the deal gets final approval from the Supreme Court.

In a unique agreement, JSW Steel had paid ₹19,500 crore in March to the lenders of BPSL with the condition that they would return the money back, if the deal was not approved by the Supreme Court.

Seshagiri Rao, Joint Managing Director, JSW Steel, said the investment in BPSL has been giving good returns and it will increase further as the company is investing to improve the operational efficiency of the plant.

Moreover, he said the company will be doubling the capacity with further investments. JSW Steel had raised a debt of ₹13,300 crore for acquiring BPSL and prepaid ₹3,300 crore in October.

Atul Sharma, Managing Partner, Link Legal, said lenders would have realised more money if the National Company Law Tribunal (NCLT) process for revival of steel units was speeded up. Though a few appointments at NCLT have been made recently it is not sufficient for faster resolution of insolvency cases, he added.

Realising value

Rajnath Yadav, Research Analyst, Choice Broking, said not only did the metal companies that acquired stressed assets benefit from steel upcycle but it has also helped financial creditors realise better value in insolvency cases of Sathavahana Ispat and MSP Metallics.

“With global supply chain easing gradually, we believe that there is limited upside in price of select commodities.Lenders can partially offload their positions and further improve their recovery rates,” he added.

In fact, JSW Steel is one of the biggest beneficiaries of insolvency cases as it has acquired downstream units of Monnet Ispat, Asian Colour Coated and Vallabh Tinplate.

Similarly, Tata Steel acquired Bhushan Steel (the Bhushan group was split into two in 2002 — with the elder brother Sanjay running Bhushan Power and Steel and younger brother Neeraj operating Bhushan Steel) for ₹35,200 crore in 2018. The once stressed asset, BSL recorded over five times increase in September quarter net profit at ₹1,837 crore against ₹342 crore in the same period last year. Tata Steel has repaid ₹11,424 crore in the first half of this fiscal to reduce its gross debt to ₹78,163 crore.

After a long delay, Tata Steel has already completed the merger of BSL with itself to capitalise on further synergy.

Jitendra Upadhyay, Senior Equity Research Analyst, Bonanza Portfolio, said given the cyclical nature of metal business lenders pursuing insolvency cases should hold back a portion of their holding in the stressed asset to realise better returns after the asset is turned around. Many steel companies, of late, have revived their capex cycle to bring down cost and improve profitability amid strong demand revival.

Steel companies are also deleveraging their balance sheet by prepaying debt supported by free cash flow and better realisations.

The strong steel cycle will help companies sustain an upward trajectory in earnings, said Upadhyay.